UNIT 2:

Consideration and Negotiation

Intended learning outcomes:

By the end of this module, students will be able to:

●Learn the meaning and requisites of consideration that constitute a holder for value
and the legal implication of failure of consideration.
●Explain who is an accommodation party, kind, and liabilities and as distinguished
from regular party.
●Learn the different methods of transferring negotiable instrument.
●Know the effects of indorsement and delivery without indorsement.
●Distinguish assignment from negotiation;
●Familiarize with the different classifications and requisites for every classification of
indorsement.

Overview:

This unit is a brief synopsis of Consideration and Negotiation of an Instruments covered by the
Negotiable Instruments Law subject and it provides the students with understanding of: (a)
accommodation party, its kind, rights and liabilities; (b) different methods of transferring
negotiable instruments; (c) classification of indorsement; and (d) distinction of assignment from
negotiation.
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Topics to be discussed:

Consideration

 Accommodation Party
  Kind of Accommodation Party
 Rights and liabilities
 Accommodation Party vs. Regular Party

Negotiation

 Different methods of transferring negotiable instruments

 Negotiation vs. Assignment
 Indorsement
 Kinds of indorsement
 Classification of indorsement
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Essential Questions:

a) How will you know that there is a failure of consideration? Cite instances.

b) Why is it important to understand the different kinds of accommodation party?

c) Distinguish negotiation from assignment.

Lesson 1:
Lesson 1: Overview and Concepts in Logistics Management
Consideration

I. Overview:

The topic will focus on Consideration in negotiable instruments, specifically

understanding and knowing: (a) who is an accommodation party; (b) kinds of an accommodation
party; (c) the rights and liabilities of an accommodation party; and (d) the difference between an
accommodation and regular party.
 II. Objectives:

At the end of the lesson you should be able to:

o Learn the meaning and requisites of consideration that constitute a holder

for value and the legal implication of failure of consideration.

o Explain who is an accommodation party, kind, and liabilities and as

distinguished from regular party.

III. Warm-Up Activity

Read again Sections 24 to 29 of The Negotiable Instruments Law (NIL) plus whatever
explanations, annotations or descriptions you can find on the subject.

IV. Content

Meaning of Consideration

 An inducement to a contract, that is, the cause, price or impelling influence

which induces a contracting party to enter into the contract. 

 The essential or most proximate purpose a party has in view at the time of
entering into the contract.

Presumption of Consideration

Section 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.

 Section 24 of the NIL provides that 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.

 Like all other contracts, a negotiable instrument must have a consideration or

cause.
  Consideration does not necessarily be expressed on a contract.

 It is presumed that negotiable instrument was issued for valuable consideration.

 Consideration being presumed, it need not be alleged or proved.

 However, the presumption is only prima facie

Valuable Consideration

Sec. 25.  Value, what constitutes. — Value is any consideration sufficient to

support a simple contract. An antecedent or pre-existing debt constitutes value; and is
deemed such whether the instrument is payable on demand or at a future time.

- Valuable consideration may *in general terms be said to consist either in some
right, interest, profit, or benefit accruing to the party who makes the contract, or
some forbearance, detriment, loss, responsibility, act, labor, or service, on the
other side.* (Story, on Promissory Notes, Sec 186)

Holder for Value

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.

 A holder for value is one who has given a valuable consideration for the
instrument issued or negotiated to him. The holder is deemed as such not only as
regards the party to whom value has been given by him but also in respect to all
those who became parties prior to the time when value was given.

 A holder of a negotiable instrument is presumed to be a holder for value until the

contrary is shown.

Absence or want of consideration

 A total lack of any valid consideration for the contract, in consequence of which
the alleged contract must fall.
 Failure of consideration

 The failure or refusal of one of the parties to do, perform or comply with the
consideration agreed upon.

 Consideration that has failed to materialized.

Accommodation Party

 A person 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.

Kinds of accommodation party

a. Accommodation maker
b. Accommodation drawer
c. Accommodation acceptor
d. Accommodation indorser

Liabilities and rights of accommodation party

a. Liabilities

1. Liable in whatever capacity he signed the instrument. The

accommodation party is liable on the instrument to a holder for value in
whatever capacity he has signed the document, whether primarily or
secondarily, even the holder for value knew that he merely sign as
accommodation party. Absence of consideration is not a valid defense
against the holder for value.

2. Liable primarily and unconditional. In lending his name to

accommodated party, accommodation party is, in effect a surety. As far as
holder for value is concerned, he is a solidary co-debtor.

b. Rights
 1. Right to revoke accommodation. Considering the accommodation is
gratuitous, it may be revoked or rescinded by cancellation or notice to
those interested at any time before the instrument is negotiated for value.

2. Right to reimbursement from accommodated party. After making

payment to the holder for value, the accommodation party has the right to
obtain reimbursement from accommodated party.

3. Right to contribution from other solidary accommodation maker.

Accommodation Party vs. Regular Party

Accommodation Party Regular Party

signs an instrument without receiving signs the instrument for value
value
signs an instrument for the purpose of does not sign for that purpose
lending his name to some other person
always show by parol evidence that he is cannot disclaim or limit his personal
only such, liability as appearing on the instrument by
parol evidence
cannot avail of the defense of absence or regular party may avail of said defense
failure of consideration against a holder against a holder not in due course
not in due course
after paying the holder, may sue for may not sue any subsequent party for
reimbursement the accommodated party reimbursement
 Lesson 2:
Lesson 1: Overview and Concepts in Logistics Management
Negotiation

I. Overview:

The topic will focus on Negotiation of an instrument, specifically understanding and

knowing: (a) different methods of transferring negotiable instruments; (b) the difference between
negotiation and assignment; and (c) indorsement, its kinds and classification.

II. Objectives:

At the end of the lesson you should be able to:

● Learn the different methods of transferring negotiable instrument;

● Distinguish assignment from negotiation;
● Know the effects of indorsement and delivery without indorsement;
● Familiarize with the different classifications and requisites for every
classification ofindorsement.

III. Warm-Up Activity

Read Sections 30 to 50 of The Negotiable Instruments Law (NIL) plus whatever

explanations, annotations or descriptions you can find on the subject.

IV. Content

What constitutes 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.

- An instrument is negotiated when it is transferred from one person to another in

such manner as to constitute the transferee the holder thereof.

- Negotiation is the transfer of instrument from one person to another made in

such manner as to constitute the transferee the holder thereof.

Three methods of transferring negotiable instrument

1. Issue
- It is the first delivery of the instrument, complete in form, to a person who takes
it as holder.

2. Negotiation
- It ordinarily involves indorsement (in regard to other than bearer paper) so that
“negotiation” and “indorsement” are often used interchangeably.
o Methods of Negotiation
 Instrument Payable to Order
 Indorsement
 Delivery
 Instrument Payable to Bearer
 Delivery

3. Assignment
- It is the less usual method, which may or may not involve an indorsement in the
sense of writing on the back of the instrument.
- Transfer of the title to the instrument

Negotiation vs. Assignment

Negotiation
Refers only to negotiable instruments
Transferee is a holder
Holder in due course is only subject to real
defense
Holder in due course may acquire better
Assignment
Refers generally to ordinary contracts
Transferee is an assignee
Assignee is subject to both real and
personal defense
Assignee merely steps into the shoes of
 title than prior party
General indorser warrants the solvency of
prior parties
Indorser is not liable unless there be
presentment and notice of dishonor
Governed by The Negotiable Instruments
Law
assignor
Assignor not warrant the solvency of prior
parties unless expressly stipulated or the
solvency is known to him
Assignor is liable even without notice of
dishonor
Governed by Article 1624 to 1635 of the
Civil Code

Indorsement

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.

- indorsement is writing of the name of the indorser on the instrument with the intent
either to transfer the title to the same, or to strengthen the security of the holder by
assuming a contingent liability for future payment, or both, completed by delivery.

- Must be written (writing or print) on the instrument itself or upon paper attached
(allonge) thereto.

- indorsement is necessary to the execution of an instrument payable to the order of

maker or drawer (order instrument)

- must be of the entire instrument, cannot be partial, unless the instrument has been
partially paid.

Kinds of indorsement

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.
Classification
1. As to the methods of Negotiation:
a. Special ( Sec. 34); or
b. Blank.
2. As to the kind of title transferred:
a. Restrictive; or
b. Non-restrictive. (Sec. 36)
3. As to scope of liability of indorser;
a. Qualified; or
b. Unqualified or general.
4. As to presence or absence of limitations:
a. Conditional; or
b. Unconditional. (Sec. 39)
5. The other kinds of indorsement
a. Joint (Sec. 41.);
b. Successive (Sec. 50, 68);
c. Irregular or anomalous; and
d. Facultative. (Sec. 111.)

1. Act No. 2031, The Negotiable Instruments Law.

Primary 2. De Leon, Hector S & De Leon Hecotr Jr, M. The Philippine Negotiable Instruments Law (and Allied
References Laws) Annotated. Manila: REX Book Store, 2004.
Other References 1. Sundiang, Jose R. & Aquino, Timoteo B. Reviewer on Commercial Law. Manila: REX Book Store, 2011.