NEGOTIABLE INSTRUMENTS RFBT

Chapter 2 Consideration ( Sec. 24 – 29)

Burden of proof - 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. 24).

Value: 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. 25)

Who is a Holder for Value (HFV)?

(1) A holder of an instrument for which value has been given at any given time but only with respect to all
parties who have become parties to the instrument prior to the time at which value has been given. (Sec.
26)
(2) A holder who as a lien on the instrument but only to the extent of his lien. (Sec. 27)

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, hence, a personal defense. ( Sec. 28)

Question 1

The instrument reads as follows:

“I promise to pay P or order P10,000.” (Sgd. M). Can P collect from M even if it is not stated in the instrument that
P gave consideration to M?

Question 2

R issued a check for P1M which he used to pay S for killing his political enemy.
(1) Can the check be considered a negotiable instrument?
(2) Does S have a cause of action against R in case of dishonor by the drawee bank?
(3) If S negotiated the check to T, who accepted it in good faith and for value, may R be held secondarily
liable by T?

Question 3
M issued a promissory note (PN) payable to the order of P for P10,000 for a jewelry which P said was made of
diamond but which was only made of glass. Subsequently, P indorsed the note to H. On due date, how much, if
any, may H recover from M?

Question 4
M issued a PN payable to the order of P for P10,000 for merchandise he had purchased from the latter. P,
however, was able to deliver merchandise worth P7,000 only. Later, P indorsed the note to H. At maturity, how
much may H collect from M?

Question 5
Digong issued a negotiable note to Tony, a government employee, to facilitate (“lagay, padulas”) the early release
of the government approval of the application that he filed. Tony negotiated the instrument to Mar, a holder in
due course. When Mar presented the instrument to Digong for payment, Digong claims that he is not liable
because the consideration was illicit. Is the refusal of Digong justified? What if Mar is not a holder in due course,
will your answer be the same?

Question 6
Santos purchased Vera’s car for P50,000. Not having enough cash at hand, Santos offered to pay in check. Vera
refused to accept the check unless it is indorsed by Reyes, their mutual friend. Reyes indorsed Santos check, and

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Vera, knowing that Reyes had not received any value for indorsing the check, accepted it. The next day, Vera
presented the check to the drawee bank for payment. Payment was refused for lack of funds. Vera gave notice of
dishonor to Reyes, but Reyes refused to pay, saying that he indorsed merely as a friend.
a. Is Reyes liable to Vera? Explain
b. In the event Reyes voluntarily pays Vera, does Reyes have the right to recover from Santos? Explain.

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 (Sec. 29).

Liability
The person to whom the instrument thus executed is subsequently negotiated has a right of recourse against the
accommodation party in spite of the former’s knowledge that no consideration passed between the
accommodation and accommodated parties (Sec. 29).

Question 7 ( Accommodation Party )

A likes to buy the Ford Car of B for P700,000 but A has only P200,000 and so he asks for a loan of P500,000 from C.
Before giving P500,000 to A, C required D and E to sign jointly and severally the promissory note for P500,000 in
favor of C which D and E did. Upon failure of A to pay P500,000, C sued D and E. In answering the complaint, D and
E stated that they never received a single centavo from the P500,000 which C loaned to A and that they just signed
the note only to help A get the loan from C. Will you absolve D and E from the complaint? Explain.

Question 8
Santos purchased Vera’s car for P50,000. Not having enough cash at hand, Santos offered to pay in check. Vera
refused to accept the check unless it is indorsed by Reyes, their mutual friend. Reyes indorsed Santos check, and
Vera, knowing that Reyes had not received any value for indorsing the check, accepted it. The next day, Vera
presented the check to the drawee bank for payment. Payment was refused for lack of funds. Vera gave notice of
dishonor to Reyes, but Reyes refused to pay, saying that he indorsed merely as a friend.
a. Is Reyes liable to Vera? Explain
b. In the event Reyes voluntarily pays Vera, does Reyes have the right to recover from Santos? Explain.

Chapter III Negotiation ( Sec. 30 -50)

Negotiation vs. Assignment

Negotiation
Negotiation is the transfer of an instrument from one
person to another in such manner as to constitute the
transferee the holder of the instrument. ( Sec. 30)
Pertains to a special class of contracts, negotiable
instruments
A person who takes an instrument by negotiation takes
it free from all equities
One who negotiates a negotiable instrument is liable to
holder in due course on the face of the instrument
without regard to the consideration received and to the
solvency or insolvency of the party primarily liable on
the instrument
Assignment
The transferee does not become a holder and he
merely steps into the shoes of the transferor. Any
defense available against the transferor is available
against the transferee.
Pertains to contracts in general
A person who takes an instrument by assignment takes
it subject to the equities incident to it
An assignor is liable only for the loss suffered by the
assignee for any breach of warranties by the assignor.

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Modes of Negotiation
BY DELIVERY – IF PAYABLE TO BEARER (SEC. 30)
Delivery means transfer of possession of instrument by the maker or drawer, with intent to transfer title to the
payee and recognize him as holder thereof.

Issuance is the first delivery of the instrument complete in form to a person who takes it as a holder (Sec. 191).

Requisites
(1) Mechanical act of writing the instrument completely and in accordance with the requirements of
Section 1; and
(2) The delivery of the complete instrument by the maker or drawer to the payee or holder with the
intention of giving effect to it.

Presumption of delivery
(1) 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 (Sec. 16)
(2) If it is in the hands of a HDC, the presumption is conclusive (Sec. 16)

Presumption as to date
(1) Date is not an essential element of negotiability
(2) An undated instrument is considered to be dated as of the time it was issued

BY INDORSEMENT COMPLETED BY DELIVERY – IF PAYABLE TO ORDER (SEC. 30)

Indorsement
(1) Where placed – The indorsement must be written (Sec. 31):
a. On the instrument itself, or
b. On a separate piece of paper attached to the instrument called “allonge”
(2) Signature of the indorser, without additional words, is a sufficient indorsement (Sec. 31)
(3) Must be of the ENTIRE instrument
(a) CANNOT indorse a part only of the amount payable; BUT if the instrument has been
paid in part, then the instrument may be indorsed as to the residue (Sec. 32)
(b) CANNOT transfer the instrument to two or more indorsees severally (Sec. 32)
Kinds of indorsement
As to manner of future method of negotiation
(1) Special
o Specifies the person to whom/to whose order the instrument is to be payable; indorsement of
such indorsee is necessary to further negotiation.
o A special indorser is liable to all subsequent holders, unless the instrument is an originally bearer
instrument, in which case he is liable only to those who take title through his indorsement (Sec
40).
o An instrument, payable to bearer, and indorsed specially, may nevertheless be further
negotiated by delivery. (Sec 40)
 Originally bearer instrument remains a bearer instrument
(2) Blank
o Specifies no indorsee, instrument so indorsed is payable to bearer, and may be negotiated by
delivery
o 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.
(Sec 35)

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o An order instrument may be converted into a bearer instrument by means of a blank
indorsement, and may be later reconverted into an order instrument by a subsequent special
indorsement
As to title transferred
(1) Restrictive – Such indorsement either:
o Prohibits further negotiation of instrument
o Constitutes indorsee as agent of indorser
o Vests title in indorsee in trust for another (Sec 36)
Rights of Restrictive Indorsee:
(a) Receive payment
(b) Bring any action thereon that the indorser could bring.
(c) Transfer his rights as such indorsee, but all subsequent indorsees acquire only the title of first indorsee
under restrictive indorsement. (Sec 37)

(2) Non-restrictive
As to kind of liability assumed by indorser
o Qualified
(a) Constitutes indorser as mere assignor of title
(b) Made by adding the words “without recourse” (Sec. 38).
(c) But this does not mean that the transferee only has the rights of an assignee; transfer
remains a negotiation and transferee can still be a holder capable of acquiring a title free
from defenses of prior parties.
(d) Effects:
 Relieves the qualified indorser of his liability to pay the instrument should the maker be
unable to pay
 The qualified indorser does not guarantee the solvency of the maker, but merely his
legal title to the instrument
 The instrument may still be further negotiated; no effect on its negotiability
o Non-qualified
As to presence/absence of express limitations
o Conditional
(a) Additional condition annexed to indorser’s liability; such condition must be expressed
(b) Where an indorsement is conditional, a party required to pay the instrument may disregard
the condition, and make payment to the indorsee or his transferee, whether condition has
been fulfilled or not.
(c) 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. (Sec. 39)
o Unconditional
Other kinds of indorsement
(1) Absolute – One by which the indorser binds himself to pay, upon no other condition than the failure of prior
parties to do so, and of due notice to him of such failure
(2) Joint – Where instrument payable to the order of two or more payees or indorsees not partners, all must
indorse, unless the one indorsing has authority to endorse for the others (Sec. 41)
(3) Irregular – Where a person, not otherwise a party to the instrument, places thereon his signature in blank
before delivery, he is liable as indorser

Exercises - Negotiation
Question 1
Give the effect of the following indorsements in an instrument:
1. “Pay to A P8,000, and to B P2,000”.
2. “Pay to A P8,000 out of the amount of P10,000 of this note”.
3. “Pay to A and B P10,000”.

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Question 2
M executed a negotiable promissory note ( PN) payable to the order of P in the amount of P10,000. Since the
instrument is payable on demand, P presented the note to M, and the latter paid P6,000. The balance of P4,000 is
the lien of P on the instrument. P thereafter indorsed it to A, ‘Pay to A P4,000, signed by P. Is the indorsement
valid?

Question 3
M executes a promissory note payable to P or order. P indorsed it to A, A to B, B to C. The indorsement of A to B is
qualified. If M is insolvent, what is the right of C?

Question 4
M executed a promissory note for P10,000 payable to P or order. P indorsed the instrument to A: “ Pay to A if he
will pass the CPA examination on October 2019” Sgd P
1. Is the instrument conditional?
2. Is the instrument negotiable?
3. Is the indorsement conditional?
4. Is the instrument payable on demand?
5. If the examination results were not yet released, and A proceeded against M, can M pay the instrument?
6. Supposing M paid A, but A failed the examination, what will happen to the P10,000?

Question 5
M executed a PN payable to P or bearer in the amount of P10,000. P delivered the note to A. A specially indorsed it
to B, B specially indorsed it to C and C delivered it to D, bearer.

1. Can D proceed against A if M is insolvent?

2. To whom A is liable?

Question 6
M makes a note payable to P or bearer P10,000, the following indorsements appear at the back of the note:
Pay to A – (sgd P)
Pay to B – ( sgd A)
Pay to C – (sgd B)
Pay to D – (Sgd C)
If D struck out the indorsement of A to B, who are the indorsers discharged?

Question 7
M, the maker, issued the instrument to P without receiving valuable consideration. Since the instrument is payable
to order, it is required that it be indorsed before delivery. P, as payee, delivered it to A without the required
indorsement.
1. Can A, transferee, collect from M, maker?
2. Is the transferee the holder of the instrument?

Question 8
“I promise to pay P or order P10,000.” (Sgd)M

M, maker, P, payee. P indorsed the instrument to A, A to B, B to C, C to D, D to E, holder.

1. Can E negotiate the instrument to B?

2. Can B indorse the instrument to another person, example X?

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