REGULATORY FRAMEWORK AND LEGAL ISSUES IN BUSINESS

CONSIDERATION Note: The holder of an NI is presumed to be

a holder for value until the contrary is shown.
VALUE – means valuable consideration.
SEC. 26. WHAT CONSTITUTES
VALUABLE CONSIDERATION – in HOLDER FOR VALUE. - Where value has
general terms be said to consist either in at any time been given for the instrument, the
some right, interest, profit or benefit holder is deemed a holder for value in respect
accruing to the party who makes the to all parties who become such prior to that
contract, or some forbearance, detriment, time.
loss, responsibility, act, labor or service, on
the other side. SEC. 27. WHEN LIEN ON INSTRUMENT
CONSTITUTES HOLDER FOR VALUE.
SEC. 24. PRESUMPTION OF — Where the holder has a lien on the
CONSIDERATION. - Every negotiable instrument arising either from contract or by
instrument is deemed prima facie to have implication of law, he is deemed a holder for
been issued for a valuable consideration; value to the extent of his lien.
and every person whose signature appears
thereon to have become a party thereto for Note: One who has taken an NI as collateral
value. security for a debt has a lien on the
instrument.
SEC. 25. VALUE, WHAT CONSTITUTES.
— Value is any consideration sufficient to WANT OR
FAILURE OF
support a simple contract. An antecedent or ABSENCE OF
CONSIDERATION
pre-existing debt constitutes value; and is CONSIDERATION
deemed such whether the instrument is Failure or refusal of
payable on demand or at a future time. one of the parties to
do, perform or
Note: comply with the
- A valuable consideration need not be consideration
adequate. It is sufficient if it is a valuable agreed upon.
Total lack/absence
one. of any valid
- As such, where Matthew sells and In other words,
consideration for
delivers to Andy a piano worth something was
the contract.
Php9,000.00 and Andy issues to agreed upon as
Matthew a PN for Php10,000.00, there is consideration but
still a valuable consideration (the piano), for some cause,
though it be inadequate. such consideration
failed to
ANTECEDENT/PRE-EXISTING DEBT materialize.
- This is a debt which is already incurred For example,
prior to the issuance of the NI. Matthew makes a
For example,
- The NI can also secure the debt of a third PN to pay Andy for
Matthew makes a
person. a parcel of land.
PN to pay Andy for
However, Andy
a parcel of land
EXAMPLE: failed to deliver it
which does not
because she sold
exist.
Matthew owes Andy Php10,000.00 the land again to
payable today. Matthew fails to pay in Jack.
cash, as such, he issued a check for that
amount to Andy who accepts it. Here, the EFFECT OF WANT OF
consideration for the check is the pre- CONSIDERATION
existing debt of Matthew. - It is a matter of defense as against any
person not a holder in due course, thus, a
HOLDER FOR VALUE - A holder for value personal defense (Sec. 28, NIL).
is one who has given a valuable consideration
for the instrument.

NEGOTIABLE INSTRUMENTS LAW 1

REGULATORY FRAMEWORK AND LEGAL ISSUES IN BUSINESS
PARTIAL FAILURE OF
CONSIDERATION
- Partial failure of consideration is a
defense pro tanto, whether the failure is
an ascertained and liquidated amount or
otherwise.
INADEQUACY OF CONSIDERATION
- GR: Inadequacy of consideration does
not invalidate the instrument.
- EXC: There has been fraud, mistake or
undue influence (Art. 1355, Civil Code).
ACCOMMODATION
PARTY
An ACCOMMODATION PARTY is one
who has:
1. Signed the instrument as maker,
drawer, acceptor, or indorser;
2. Without receiving value therefor; and
3. 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. (Sec. 29, NIL)
ACCOMMODATION NOTE/BILL – one
to which the accommodation party has put
his name, without consideration, for the
purpose of accommodating some other party
who is to use it and is expected to pay it.
EXAMPLE:
Matthew is in immediate need of
Php300,000.00 but he cannot find
anyone to lend him such amount. No one
trusts him.
As such, he goes to Andy, his rich aunt,
willing to accommodate him by letting
him borrow on Andy’s credit.
As such, Andy signs a PN payable to
Matthew even without receiving any
consideration.
Here, the PN is an accommodation note.
Matthew is the accommodated party
while Andy is the accommodation party.
NEGOTIABLE INSTRUMENTS LAW 2
LIABILITY OF THE
ACCOMMODATION PARTY
- The accommodation party is liable on the
instrument to a holder for value.
- Q: Is the accommodation party still liable
even if the holder for value, at the time of
taking the instrument, knew him to be
only an accommodation party?
A: Yes, since the absence of consideration
is not a defense.
EXTENT OF LIABILITY OF AN
ACCOMMODATION PARTY
1. RIGHT TO REVOKE
ACCOMMODATION – before the
instrument has been negotiated for value.
2. RIGHT TO REIMBURSEMENT
FROM THE ACCOMMODATED
PARTY – the accommodated party is the
real debtor. Hence, the cause of action is
not on the instrument but on an implied
contract of reimbursement.
3. RIGHT TO CONTRIBUTION FROM
OTHER SOLIDARY
ACCOMMODATION MAKER
NEGOTIATION
TRANSFER – the process by which
property is delivered by one person to
another.
METHODS OF TRANSFERRING AN
INSTRUMENT
1. ISSUANCE – first delivery of the
instrument complete in form to a person
who takes it as a holder.
2. NEGOTIATION - the transfer of an
instrument from one person to another so
as to constitute the transferee the holder
thereof (Sec. 30, NIL).
EXAMPLE:
Matthew makes a PN in favor of Andy
and hands it over to the latter. This is
what we call the issuance, since this is
the first delivery of the note from Mattew
who is the maker.
After receiving the note, Andy can now
negotiate it to anyone. For example, she
can negotiate it Jack as payment for the
goods that she purchased from him. After
which, Jack can negotiate it again to
other people.
REGULATORY FRAMEWORK AND LEGAL ISSUES IN BUSINESS

3. ASSIGNMENT – transfer of the title to EFFECT OF DELIVERY OF ORDER

the instrument, with the assignee INSTRUMENT WITHOUT
generally taking only such title as his INDORSEMENT
assignor has, subject to all defenses - The transfer operates as a normal
available against the assignor. assignment and the assignee (the one to
- The parties are the assignor (the one whom the instrument was delivered) is
who transfers) and assignee (the one merely placed in the position of the
who receives the instrument). assignor.
- The assignee acquires the instrument
NEGOTIATION ASSIGNMENT subject to all the defenses available
As to the subject instrument against the assignor.
Non-negotiable - Without the indorsement, the transferee
instrument may be does not become the holder of the
Only a negotiable instrument.
assigned absent any
instrument may be - However, the transferee has the right to
prohibition against
negotiated. have the indorsement of the transferor.
assignment written
on its face. - When indorsement is subsequently
As to right acquired obtained, the transfer operates as a
The transferee does proper negotiation but only as of the time
The transferee, if he not become a the indorsement is actually made.
is a holder in due holder and can have
course (HIDC) may no better right than DELIVERY – transfer of possession, actual
acquire better his transferor; he or constructive, from one person to another.
rights than his merely steps into
transferor. the shoes of the Note: Where the instrument is no longer in
assignor. the possession of the party whose signature
As to liability and right of recourse appears thereon, there is a prima facie
The holder can hold presumption of a valid and intentional
The transferee has delivery by him (Sec. 16, NIL).
the drawer and the
no right of recourse
indorsers liable if
for payment against
the party primarily
immediate parties. INDORSEMENT
liable does not pay.
As to defenses available
Any defense It is the signing of the name of the indorser
available against on the instrument with the intent to transfer
the transferor is title to the same.
available against
the transferee. WHERE MADE:
1. Written on the instrument itself; or
MODES OF NEGOTIATION 2. Upon a paper (“Allonge”) attached
thereto.
INSTRUMENT MODE
Bearer Instrument Note: This must be attached to the
Negotiated by mere NI and made an integral part of it so
(If payable to
delivery. as to make the indorsement on a
bearer)
Negotiated by the separate paper valid.
indorsement of the
Order Instrument holder, completed EXAMPLE:
(If payable to by delivery.
order) (Face/Front of the Instrument)
(Indorsement + May 18, 2021
Ilocos Sur
Delivery)
Php10,000.00

For value received, I promise to pay to the order of

Matthew the amount of TEN THOUSAND PESOS (Php10,000.00)
on or before June 30, 2021 at his residence in Vigan City, Ilocos Sur.

(Sgd.) Andy

NEGOTIABLE INSTRUMENTS LAW 3

REGULATORY FRAMEWORK AND LEGAL ISSUES IN BUSINESS

(Back of the Instrument) However, as an EXCEPTION, where

the instrument has been paid in part,
Pay to the order of Jack Php10,000.00. it may be indorsed as to the residue.
(Sgd.) Matthew

Pay to the order of Chris Php10,000.00.

(Sgd.) Jack
2. Transfer to two or more persons
severally (separately/individually).

Here, the maker of the PN is Andy. As such, EXAMPLE:

Andy is the one who must issue the same to
May 18, 2021
Matthew, the payee. Ilocos Sur

Php10,000.00
When the PN was issued to Matthew, it I promise to pay to the order of Matthew the amount of
means that it was the first delivery of the (Php10,000.00).

instrument complete in form to Matthew, (Sgd.) Andy

who takes the PN as a holder.
Pay to the order of Jack Php7,000.00.
After which, the PN can now be negotiated. (Sgd.) Matthew
Being an order instrument (it is payable to Pay to the order of Chris Php3,000.00.
(Sgd.) Matthew
the order of Matthew), negotiation will be
made through indorsement + delivery.
This also violates the rule that the
Here, negotiation was made by Matthew to indorsement must cover the entire
Jack by making an indorsement at the back instrument.
of the instrument and delivering the same to
him. Thus, Jack also takes the instrument as This is, however, valid:
a holder.
EXAMPLE:
Being the holder, Jack can negotiate it to
May 18, 2021
other persons and so on. This is what we Ilocos Sur
mean when we say an instrument passes Php10,000.00
from hand to hand. I promise to pay to the order of Matthew the amount of
(Php10,000.00).

SCOPE (Sgd.) Andy

- The indorsement must be an
indorsement of the entire instrument.
Pay to order of Jack and Chris Php10,000.00.
(Sec. 32, NIL) (Sgd.) Matthew
- The following do not operate as a
negotiation of the instrument:
1. Transfer of only a part of the Here, should Jack and Chris wish to
instrument. indorse the instrument, they must
both do so together. However, if they
EXAMPLE: are partners and one is authorized,
the one authorized may indorse it on
May 18, 2021
Ilocos Sur their own.
Php10,000.00

I promise to pay to the order of Matthew the amount of

KINDS OF INDORSEMENTS
(Php10,000.00). 1. As to the methods of negotiation
(Sgd.) Andy a. SPECIAL - specifies the person
to whom, or to whose order, the
instrument is to be payable.
Pay to Jack Php8,000.00.
(Sgd.) Matthew
Note: The indorsement of such
indorsee is necessary to the
This is not allowed because the entire further negotiation of the
instrument must be indorsed. instrument.

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REGULATORY FRAMEWORK AND LEGAL ISSUES IN BUSINESS

EXAMPLE: contract consistent with the

May 18, 2021
character of the indorsement. Like
Ilocos Sur this:
Php10,000.00
May 18, 2021
I promise to pay to the order of Matthew the amount of Ilocos Sur
(Php10,000.00).
Php10,000.00
(Sgd.) Andy
I promise to pay to the order of Matthew the amount of
(Php10,000.00).

(Sgd.) Andy
Pay to order of Jack Php10,000.00.
(Sgd.) Matthew
Pay to Chris Php10,000.00
(Sgd.) Matthew

Here, the indorsement of the

indorsee, Jack, is necessary to the 2. As to the kind of title transferred
further negotiation of the instrument. a. RESTRICTIVE - An
This means that it is only Jack who indorsement is restrictive which
can indorse the PN. either:

b. BLANK - specifies no indorsee. a.1. Prohibits the further

- The signature of the indorser, negotiation of the instrument:
without additional words, is a
sufficient indorsement. “Pay to Jack only.”
- An instrument so indorsed
becomes payable to bearer a.2. Constitutes the indorsee the
and as such, and may already agent of the indorser:
be negotiated by delivery.
“Pay to Jack for collection.”
EXAMPLE:
May 18, 2021 Here, Jack only becomes an
Ilocos Sur
agent and does not acquire
Php10,000.00 title to the note. He only has a
I promise to pay to the order of Matthew the amount of right to collect the amount
(Php10,000.00).
covered by the PN.
(Sgd.) Andy

a.3. Vests the title in the indorsee

(Sgd.) Matthew in trust for or to the use of
some other persons:
Here, the indorsement made by “Pay to Jack in trust for Chris.”
Matthew was a blank one since no
“Pay to Jack for the use of Chris.”
indorsee was indicated. As such,
though the PN was an order
Q: What is the effect of a
instrument initially, through the
restrictive indorsement?
blank indorsement of Matthew, it
now becomes payable to bearer. A: A restrictive indorsement
confers upon the indorsee the
right:
Being a PN which is payable to
- to receive payment of the
bearer, the one who received the PN
instrument;
from Matthew can further negotiate
it by delivery only. - to bring any action thereon
that the indorser could bring;
Let us say that Jack was the one who - to transfer his rights as such
received the PN from Matthew. indorsee, where the form of
the indorsement authorizes
him to do so.
Here, Jack, the holder, may convert a
blank indorsement into a special
indorsement by writing over the Note: All subsequent
signature of the indorser in blank any indorsees acquire only the

NEGOTIABLE INSTRUMENTS LAW 5

REGULATORY FRAMEWORK AND LEGAL ISSUES IN BUSINESS
title of the first indorsee
under the restrictive
indorsement.
b. NON-RESTRICTIVE
3. As to the scope of liability of
indorser
a. QUALIFIED - constitutes the
indorser a mere assignor of the
title to the instrument.
- It only means that the
qualified indorser is NOT
liable if the holder is unable to
collect on the NI because of
the insolvency of prior
parties, or for other causes.
- This indorsement does not
impair the negotiable
character of the NI.
- How made: By adding the
words “without recourse” or
words of similar import such
as “indorser not holder” “at
the indorsee’s risk”.
b. UNQUALIFIED/GENERAL
4. As to presence or absence of
limitations
a. CONDITIONAL – Right of the
indorsee is made to depend on the
happening of a contingent event.
- The party required to pay may
disregard the conditions.
“Pay to the order of Jack if he passes the
CPA board examination in 2021.”
b. UNCONDITIONAL
5. Other kinds
a. JOINT - Indorsement made
payable to 2 or more persons who
are not partners.
“Pay to order of Jack and Chris
Php10,000.00.”
b. IRREGULAR – A person who,
not otherwise a party to an
instrument, places thereon his
signature in blank before delivery
(Sec. 64, NIL).
c. FACULTATIVE – Indorser
waives presentment and notice of
dishonor, enlarging his liability
and his indorsement.
NEGOTIABLE INSTRUMENTS LAW 6
d. SUCCESSIVE – Indorsement to
two persons or more in
succession. Any of them can
indorse to effect negotiation of
the instrument.
Q: What happens if a bearer instrument was
indorsed?
A: If indorsed specially, it may nevertheless
be further negotiated by mere delivery since
an indorsement is not necessary to negotiate
a bearer instrument. (Sec. 40, NIL)
EXAMPLE:
May 18, 2021
Ilocos Sur
Php10,000.00
I promise to pay to Matthew or bearer the amount of
(Php10,000.00).
(Sgd.) Andy
Let us say that this PN was already
issued in favor of Matthew. Thus,
Matthew is the current holder of the
instrument.
Since this is a bearer instrument,
Matthew can merely deliver the same
so as to make negotiation.
However, what happens if Matthew
indorsed and delivered it to Jack?
May 18, 2021
Ilocos Sur
Php10,000.00
I promise to pay Matthew or bearer the amount of
(Php10,000.00).
(Sgd.) Andy
Pay to order of Jack Php10,000.00.
(Sgd.) Matthew
Though the same was indorsed by
Matthew, it does not convert it to an
order instrument. As such, Jack can
negotiate it further to another by
merely delivering it.
However, Matthew, being the one who
specially indorsed it to Jack is liable as
indorser only to Jack, the holder who
acquired title by virtue of his
indorsement.
What do we mean by this?
REGULATORY FRAMEWORK AND LEGAL ISSUES IN BUSINESS

EXAMPLE: INSTRUMENT DRAWN OR INDORSED

May 18, 2021
TO A PERSON AS CASHIER
Ilocos Sur - Where an instrument is drawn or
Php10,000.00 indorsed to a person as "cashier" or other
I promise to pay to Matthew or bearer the amount of
fiscal officer of a bank or corporation, it is
(Php10,000.00). deemed prima facie to be payable to the
(Sgd.) Andy bank or corporation of which he is such
officer, and may be negotiated by either
the indorsement of the bank or
Matthew corporation or the indorsement of the
Indorsement officer.
Anna
Indorsement INDORSEMENT WHERE NAME IS
Bea MISSPELLED, AND SO FORTH
Indorsement - Where the name of a payee or indorsee is
Chris wrongly designated or misspelled, he
Delivery
may indorse the instrument as therein
Diane described adding, if he thinks fit, his
proper signature.
Delivery
Hazel
INDORSEMENT IN REPRESENTATIVE
CAPACITY
Here, Matthew is only liable to Anna, - Where any person is under obligation to
Bea, and Chris but not to Diane and indorse in a representative capacity, he
Hazel because they are the only may indorse in such terms as to negative
persons who acquired title through personal liability.
his indorsement.
TIME OF INDORSEMENT
Anna is only liable to Bea and Chris - GR: Every negotiation is deemed prima
but not to Diane and Hazel. facie to have been effected before the
instrument was overdue.
Bea is only liable to Chris but not to - EXC: When an indorsement bears date
Diane and Hazel. after the maturity of the instrument.

Chris is liable to Diane but not to PLACE OF INDORSEMENT

Hazel. - GR: Every indorsement is presumed
prima facie to have been made at the
Diane is liable to Hazel. place where the instrument is dated.
- EXC: When the contrary appears.
INDORSEMENT WHERE THE
INSTRUMENT IS PAYABLE TO TWO CONTINUATION OF NEGOTIABLE
OR MORE PERSONS CHARACTER
- Where an instrument is payable to the - An instrument negotiable in its origin
order of two or more payees or indorsees continues to be negotiable until it has
who are not partners, all must indorse been restrictively indorsed or discharged
unless the one indorsing has authority to by payment or otherwise.
indorse for the others. (Sec. 41, NIL)

INDORSING AN INSTRUMENT AS
CASHIER OR OTHER OFFICERS OF A
CORPORATION
- The negotiable instrument is deemed
prima facie payable to the corporation of
which said person is such an officer.
- It may be negotiated further by either
indorsement of the corporation or
indorsement of the officer (Sec. 42, NIL).
STRIKING OUT OF AN
INDORSEMENT
The holder may at any time strike out any
indorsement which is not necessary to his
title. (Sec. 48, NIL)
EFFECT: The indorser whose indorsement
is struck out, and all indorsers subsequent to

NEGOTIABLE INSTRUMENTS LAW 7

REGULATORY FRAMEWORK AND LEGAL ISSUES IN BUSINESS

him, are thereby relieved from liability on the 2. BEARER INSTRUMENT

instrument. (Sec. 48, NIL)
In determining whether an indorsement is
necessary to the holder’s title, the following
shall be observed:
1. ORDER INSTRUMENT
- If there are blank, as well as other
special indorsements, the holder
may strike out any indorsements
following a blank indorsement.
- If there are only special
indorsements, the holder may not
strike out any indorsement since
he must trace his title through all
the indorsements.
EXC: Sec. 50, NIL
- Where an instrument is
negotiated back to a PRIOR
PARTY.
- The holder may strike out any
indorsement, whether blank or
special.
- Q: Why can the holder strike out
any indorsement?
A: Since an indorsement is not
necessary to the title of the
holder.
- Q: Why is an indorsement not
necessary to the title of the
holder?
A: An indorsement is not
necessary to the title of the holder
because mere delivery is enough
for the negotiation of a bearer
instrument.
EXAMPLE:
May 18, 2021
Ilocos Sur

Php10,000.00
Q: What happens when an I promise to pay to the order of Matthew the amount of
instrument is negotiated back to a (Php10,000.00).

prior party? (Sgd.) Andy

A: The following are the effects:
a. The prior party may reissue and
Pay to order of Ana
further negotiable the (Sgd.) Matthew
instrument. Pay to order of Bea.
(Sgd.) Ana
b. The prior party cannot enforce Pay to order of Chris.
(Sgd.) Bea
payment against any intervening Pay to order of Diane
(Sgd.) Chris
party to whom he was personally Pay to order of Ester
liable. (Sgd.) Diane
Pay to order of Hazel
c. The prior party can strike out his (Sgd.) Ester
indorsement and those of
intervening parties.
Q: What kinds of indorsements were
EXAMPLE: made here?
A: The indorsements are all special
Matthew indorsements.

Anna Q: Who is the holder of the instrument?

A: It is Hazel because, in the example, she
Bea is the last one to whom the instrument
was indorsed to.
Chris
Q: As the holder of the PN, which among
Diane the indorsements can Hazel strike out?
A: The PN is an order instrument and all
Anna the indorsements are special
indorsements. As such, Hazel cannot
strike out any indorsement because she
Here, Anna becomes the prior party must trace her title through all the
since the NI was renegotiated to her. indorsements.
- Here, all the indorsements made by
the parties are necessary for her title.

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REGULATORY FRAMEWORK AND LEGAL ISSUES IN BUSINESS

EXAMPLE: - Here, Hazel can strike out the

May 18, 2021
indorsement made after the blank
Ilocos Sur indorsement of Bea.
Php10,000.00 - The blank indorsement made by Bea
I promise to pay to the order of Matthew the amount of
made the instrument payable to
(Php10,000.00). bearer and can be negotiated by mere
(Sgd.) Andy delivery.
- As such, all the subsequent special
indorsements after the blank
Pay to order of Ana
(Sgd.) Matthew indorsement are not necessary to
Pay to order of Bea.
(Sgd.) Ana
Hazel’s title since she could have
acquired the instrument without
(Sgd.) Bea
Pay to order of Diane those indorsements and merely by its
(Sgd.) Chris
Pay to order of Ester
delivery.
(Sgd.) Diane
Pay to order of Hazel
- As such, Chris did not need to
(Sgd.) Ester indorse the same to Diane since,
being an instrument payable to
bearer, Chris could have just
Q: What kinds of indorsements were delivered it to Diane.
made here?
A: The indorsement made by Bea (3rd Q: What happens after the striking out
indorsement) was a blank indorsement. the indorsements of Chris, Diane and
All the others were special indorsements. Ester?
A: Chris, Diane and Ester are discharged
Q: What happened when Bea indorsed of their liability on the PN.
the check in blank?
A: The instrument becomes payable to Q: Can Hazel strike out Matthew’s
bearer and, as such, the holder can indorsement to Ana?
already negotiate the PN by mere A: No, the holder cannot strike out the
delivery. payee’s (Matthew) indorsement. Neither
- In this case, let us say that Bea can Hazel strike out Ana and Bea’s
delivered the PN to Chris. indorsements.
- Being the holder at that time, Chris
decided to indorse it to Diane. EXAMPLE:
May 18, 2021
Q: Who is the holder of the instrument? Ilocos Sur

A: It is Hazel because, in the example, she Php10,000.00

is the last one to whom the instrument I promise to pay to the order of Matthew the amount of
was indorsed to. (Php10,000.00).

(Sgd.) Andy
Q: As the holder of the PN, which among
the indorsements can she strike out?
Pay to order of Ana
A: The PN is an order instrument and (Sgd.) Matthew
there are blank and special indorsements. Pay to order of Bea.
(Sgd.) Ana
As such, Hazel may strike out any Pay to order of Chris.
(Sgd.) Bea
indorsements following the blank Pay to order of Diane
(Sgd.) Chris
indorsement. Pay to order of Ester
(Sgd.) Diane
Pay to order of Ana
(Sgd.) Ester
Pay to order of Ana
(Sgd.) Matthew
Pay to order of Bea.
(Sgd.) Ana

(Sgd.) Bea
Q: Who is the holder of the instrument?
Pay to order of Diane A: It is Ana because, in the example, she
(Sgd.) Chris
Pay to order of Ester is the last one to whom the instrument
(Sgd.) Diane
Pay to order of Hazel was indorsed to.
(Sgd.) Ester Ana is considered as a prior party to
whom the instrument was renegotiated
to.
NEGOTIABLE INSTRUMENTS LAW 9
REGULATORY FRAMEWORK AND LEGAL ISSUES IN BUSINESS
Q: As the holder of the PN, which among
the indorsements can she strike out?
A: As a prior party, Ana can strike out her
own indorsement and those of
intervening parties.
Pay to order of Ana
(Sgd.) Matthew
Pay to order of Bea.
(Sgd.) Ana
Pay to order of Chris.
(Sgd.) Bea
Pay to order of Diane
(Sgd.) Chris
Pay to order of Ester
(Sgd.) Diane
Pay to order of Ana
(Sgd.) Ester
Q: Can Ana strike out individually the
indorsements of Bea, Chris, Diane and
Ester without striking her own
indorsement to Bea?
A: No, because if she strikes out any of
those indorsements without striking out
her own indorsement to Bea, it is Bea who
will be considered as the last indorsee
and not her. Thus, the indorsements of
Bea, Chris, Diane and Ester are needed to
trace the title back to her.
- As such, if Ana wishes to strike out
their indorsements, she must also
strike out her own indorsement to
Bea.
- In doing so, the last indorsement
would be the indorsement made by
Matthew to Ana.
RIGHTS OF A HOLDER
HOLDER - The payee or indorsee of a bill or
note who is in possession of it or the bearer
thereof. (Sec. 191, NIL)
RIGHTS OF A HOLDER
- In general, a holder has the right:
1. To sue in his own name; and
2. To receive payment and payment to
him in due course discharges the
instrument. (Sec. 51, NIL)
CLASSES OF HOLDERS
1. HOLDERS IN GENERAL – those in
possession of the instrument;
2. HOLDERS FOR VALUE - one who
has given a valuable consideration for
the instrument; and
3. HOLDERS IN DUE COURSE
NEGOTIABLE INSTRUMENTS LAW 10
HOLDER IN DUE
COURSE (HIDC)
To be considered as an HIDC, the holder
must have taken the instrument under the
following conditions:
1. That it is complete and regular upon
its face;
2. That he became the holder of it before
it was overdue, and without notice
that it has been previously
dishonored, if such was the fact;
3. That he took it in good faith and for
value; and
4. 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.
COMPLETE AND REGULAR ON ITS
FACE
- An instrument is complete when it is not
wanting in any material particular.
- It is regular when there is no alteration
apparent on the face of the instrument.
BECAME THE HOLDER BEFORE IT
WAS OVERDUE
- An overdue instrument is still negotiable
although it is subject to defenses existing
at the time of transfer.
- A negotiable instrument in circulation
past its maturity date carries strong
indication that it has been dishonored.
- An overdue instrument puts all person on
notice that it might not have been paid
because of a valid defense to such
payment.
WITHOUT NOTICE THAT IT HAS
BEEN PREVIOUSLY DISHONORED
- An instrument may be dishonored either
by:
1. Non-acceptance (refers to a bill of
exchange); or
2. Non-payment.
HOLDER TOOK IT IN GOOD FAITH
AND FOR VALUE
- Good faith is the holder’s well founded
or honest belief that the person from
whom he received the instrument was
the owner thereof, with the right to
transfer it.
REGULATORY FRAMEWORK AND LEGAL ISSUES IN BUSINESS
- Value may be some right, interest, profit
or benefit to the party who makes the
contract or some forbearance, detriment,
loan, responsibility, etc. to the other.
NO NOTICE OF ANY INFIRMITY IN
THE INSTRUMENT OR DEFECT IN
THE TITLE OF THE PERSON
NEGOTIATING IT
- The person to whom it is negotiated must
have had actual knowledge of such facts
or knowledge of other facts that his
action in taking the instrument
amounted to bad faith. (Sec. 56, NIL)
- Presence or absence of defect or infirmity
must be determined at the time the
instrument was negotiated to the holder.
Q: When is the title over the instrument
considered as defective?
A: When he obtained the instrument, or any
signature thereto, by:
1. Fraud, duress, or force and fear;
2. Other unlawful means;
3. For an illegal consideration;
4. When he negotiates it in breach of
faith or under such circumstances
amounting to a fraud. (Sec. 55, NIL)
Q: What if the transferee receives notice of
any infirmity or defect after having paid
partial but before he had paid the full
amount?
A: The transferee will be deemed a holder in
due course only to the extent of the amount
paid by him before the notice. (Sec. 54, NIL)
PRESUMPTION
- Every holder is deemed prima facie to be
an HIDC. (Sec. 59, NIL)
- When it is shown that the title of any
person who has negotiated the
instrument was defective, the holder has
must prove that he or some person under
whom he claims acquired the title as
HIDC.
Note: The rule on proving title as HIDC
does not apply in favor of a party who
became bound on the instrument prior to
the acquisition of such defective title.
RIGHTS OF AN HIDC
- The following are the rights of an HIDC:
1. To sue on the instrument in his own
name (Sec. 51, NIL);
NEGOTIABLE INSTRUMENTS LAW 11
2. To receive payment and payment to
him in due course discharges the
instrument (Sec. 51, NIL);
3. Holds the instrument free from any
defect of title of prior parties, and free
from defenses available to prior
parties among themselves (Sec. 57,
NIL); and
4. Enforce payment of the instrument
for the full amount against all parties
liable thereon. (Sec. 57, NIL)
Q: What happens when a holder is not an
HIDC?
A: The law does not provide that a holder
who is not an HIDC may not recover on the
instrument. The only disadvantage is that the
instrument is subject to defenses as if it were
non-negotiable.
PERSONS NOT DEEMED A HOLDER IN
DUE COURSE
1. A holder who acquires the instrument
after its date of maturity.
2. Where an instrument payable on
demand is negotiated for an
unreasonable length of time after its
issue (Sec. 53, NIL).
Note:
a. A note payable on demand is due
when payment is demanded.
b. A check becomes overdue when it
is not presented for payment
within a reasonable time, usually 6
months from date the thereof,
afterwards, it becomes a stale
check.
3. Where the instrument contains an
acceleration clause, knowledge of the
holder at the time of acquisition thereof
that one installment or interest, or
both, is unpaid is a notice that it is
overdue.
RIGHTS OF A HOLDER NOT A HOLDER
IN DUE COURSE
- 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.
(Sec. 58, NIL)
- The following are the right of a holder not
an HIDC:
1. To sue on the instrument in his own
name (Sec. 51, NIL);
REGULATORY FRAMEWORK AND LEGAL ISSUES IN BUSINESS

2. To receive payment and payment to a party not an HIDC, transfers all

him in due course discharges the
instrument (Sec. 51, NIL);
3. To hold the instrument but is subject
to the same defenses as if it were non-
negotiable (Sec. 58, NIL); and
4. To have all the rights of an HIDC if he
derives his title through such HIDC
and he himself is not a party to any
fraud or illegality affecting the
instrument. (Sec. 58, NIL)
his rights as such holder to the
latter.
- Here, the holder not an HIDC
acquires the right to enforce the
instrument as if he was an HIDC.
- The principle applies to a
“SHELTERED HOLDER” who
is not a party to any fraud or
illegality impairing the validity of
the instrument.

SHELTER PRINCIPLE OR
HOLDER IN DUE COURSE BY
SUBROGRATION
- Under this principle, the HIDC,
by negotiating the instrument, to

DEFENSES AGAINST THE HOLDER

REAL OR ABSOLUTE DEFENSES PERSONAL OR EQUITABLE DEFENSES

Those which grow out of the agreement or
conduct of a particular person which renders
Those that are attached to the instrument
it inequitable for him, though holding the
itself.
legal title, to enforce it against the party
sought to be made liable.
These defenses are available against all
These defenses are only available against a
parties, both immediate and remote,
holder not in due course.
including HIDC.

The real or absolute defenses are:

The personal or equitable defenses are:
a. Incomplete and undelivered
a. Innocent alteration or spoliation;
instrument;
b. Discharge of party secondarily liable
b. Minority (available only to the minor);
by discharge of prior party;
c. Incapacity as far as incapacitated
c. Set-off between immediate parties;
persons are concerned;
d. Filling up of blanks not in accordance
d. Ultra –vires acts of a corporation;
with the authority given;
e. Want of Authority, apparent and real;
e. Acquisition of instrument by duress or
f. Fraudulent alteration;
force and fear, unlawful means, or for
g. Forgery;
an illegal consideration;
h. Duress amounting to Forgery;
f. Discharge by payment or renunciation
i. Prescription;
or release before maturity;
j. Other infirmities appearing on the face
g. Failure or absence of consideration;
of the instrument;
h. Undelivered complete instrument;
k. Discharge in insolvency;
i. Insertion of a wrong date; and
l. Illegal Contract; and
j. Fraud in inducement or simple fraud.
m. Fraud in Factum or Esse Contractus

FRAUD IN INDUCEMENT relates to the

FRAUD IN FACTUM exists in those cases
quality, quantity, value or character of the
in which a person, without negligence, has
consideration of the instrument.
signed an instrument, but was deceived as to
the character of the instrument and without
Here, deceit is not in the character of the
knowledge of it.
instrument but in its amount or terms.

NEGOTIABLE INSTRUMENTS LAW 12

REGULATORY FRAMEWORK AND LEGAL ISSUES IN BUSINESS

As where a note was signed by one under the
belief that he was signing as a witness to a
deed.
This kind of fraud is a real defense because
there is no contract, since the person did not
know what he was signing.
This exists when a person is induced to sign a
note for the price of a worthless stock which
was fraudulently represented by the payee as
to its value.
Such type of fraud is only a personal defense
because it does not prevent a contract.

NEGOTIABLE INSTRUMENTS LAW 13