CHAPTER 2 AND 3 OF THE NIL

OBJECTIVES:

 You need to know the concept of consideration in an instrument;

 You need to be able to understand how an instrument is being negotiated;
 Kinds of indorsement and the striking;
 Who is a holder for value;
 Lien on the instrument
 Negotiation to a prior party

WHAT IS A CONSIDERATION?
It is an inducement to a contract that is the cause, price or impelling influence, which induces
a party to enter into a contract. Every negotiable instrument is deemed prima facie to have been
issued for a valuable consideration. Every person whose signature appears thereon is party for value.
(Sec.24) This presumption is disputable. You are not just signing for nothing, it is presumed to have
been made for something.

Effect: Every person whose signature appears thereon is party for value.

Like for example, a check constitutes an evidence of indebtedness and is a veritable proof of an
obligation. Thus, based on Sec. 24 of the NIL, checks complete and delivered to a person by another
are sufficient by themselves to prove the existence of the loan obligation obtained by the latter from
the former.

Q: R issued a check for P1M which he used to pay S for killing his political enemy. Can the check be
considered a negotiable instrument?

A: YES. The check can be considered as a negotiable instrument since it complied with the
requirements of negotiability under Sec. 1 of the Negotiable Instruments Law. The unlawful
consideration for the issuance of the check is of no moment and will not affect the negotiability of the
check as it merely constitutes a defect of title under Sec. 55 of the NIL.

Want and failure of consideration are not defenses against a holder in due course.
ILLUSTRATION: WANT OF CONSIDERATION

Pay to X or order the amount of 10,000 on February

14, 2021 W issued the bill of exchange as payment for the Guitar he
SGD. W ordered. But it appears that there is no guitar in the first place.

Pay to Y or order
SGD X X Indorses it to Y, a holder for value.

Pay to Z or order
SGD Z Z is a holder in due course.
In the first scenario, the instrument was issued without a consideration and that the underlying
contract for which it was issued did not materialize.

Now, the instrument was negotiated to a holder for value, Y. Can Y collect payment from the drawer
of the order instrument or to W? No, since there is an absence of consideration and the want of
consideration is a defense that can be interposed as against any holder except a holder in due course.

Assuming that it was negotiated to Z, a holder in due course, what will happen? Here, despite the
absence of consideration, Z may collect from W, the drawer, and that W cannot use the defense of
want of consideration.

Effect of want of consideration

It is a matter of defense as against any person not a holder in due course, thus, a personal
defense (NIL, Sec. 28).

Take note that absence of consideration includes situations when the consideration given is
contrary to law, morals, and public policy.

Holder for value

A holder for value is one who has given a valuable consideration for the instrument. A holder
for value is deemed as such not only as regards the party to whom the value has been given to by
him but also in respect to all those who became parties prior to the time when value was given. (NIL,
Sec.26)

Value

It 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 (NIL, Sec. 25).

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.

X owes Y 10,000 pesos.

Pay to Y or Order 10,000

SGD X

Pay to Z or order

SGD Y

X issued an order instrument as payment of his debt to Y. Y then negotiated it to Z as payment for
his debt amounting to 8,000. Now to what extent may Z collect from the drawer, X?
Z may collect the whole amount appearing on the instrument which is 10,000 even if his lien to
instrument is merely 8,000 however he is holding the excess 2,000 in favor of Y.

What would be the exception where a person may be held liable despite the absence of
consideration?
 ACCOMODATION PARTY

An accommodation party is one who has signed the instrument as maker, acceptor, indorser
or drawer, without receiving value therefor, and for the purpose of lending his name to some other
person.

It does not mean, however, that one cannot be an accommodation party merely because he
has received some consideration for the use of his name. The phrase “without receiving value
therefor” only means that no value has been received “for the instrument” and not “for lending his
name.”

Susan Kawada borrowed P500,000 from XYZ Bank which required her, together with Rose
Reyes who did not receive any amount from the bank, to execute a promissory note payable to the
bank, or its order on stated maturities. The note was executed as so agreed. What kind of liability
was incurred by Rose, that of an accommodation party or that of a solidary debtor? Explain.

Rose incurs the liability of an accommodation party since she executed the promissory
without receiving value therefor and for the purpose of lending his name to Susan Kawada, the
accommodated party. Nonetheless, as an accommodation maker, Rose is primarily and
unconditionally liable on the promissory note to a holder for value, regardless of whether she stands
as a surety or solidary co-debtor since such distinction would be entirely immaterial and
inconsequential as far as a holder for value is concerned.

Juan Sy purchased from “A” Appliance Center one generator set on installment with chattel
mortgage in favor of the vendor. After getting hold of the generator set, Juan Sy immediately sold it
without consent of the vendor. Juan Sy was criminally charged with estafa. To settle the case extra
judicially, Juan Sy paid the sum of P20,000 and for the balance of P5,000.00 he executed a promissory
note for said amount with Ben Lopez as an accommodation party. Juan Sy failed to pay the balance.

a. What is the liability of Ben Lopez as an accommodation party? Explain.

b. What is the liability of Juan Sy?

Section 29 of the Negotiable Instruments Law provides that an accommodation party is liable
on the instrument to a holder for value, notwithstanding that such holder at the time of taking the
instrument knew him to be only an accommodation party. As an accommodation party, Ben Lopez
is primarily and unconditionally liable on the promissory note to a holder for value as if the contract
was not for accommodation. Under Section 14 of the NIL, Juan Sy is primarily liable to the extent of
P5,000 in the hands of a holder in due course. However, if Ben Lopez paid the note, Juan Sy has the
obligation to reimburse the former to the extent of the amount paid.
ACCOMMODATION PARTY REGULAR PARTY

Signs an instrument without receiving value therefor. Signs an instrument for value

Purpose of signing is to lend his name to another person Not for that purpose

Cannot avail of the defense of absence/failure of May avail of such defense

Consideration

against a holder not in due course.

May sue reimbursement after paying the holder/ May not sue

subsequent party

CHAPTER 3
NEGOTIATION
Negotiation is the transfer of an instrument from one person to another so as to constitute the
transferee the holder thereof (NIL, Sec. 30)

A holder is the payee or indorsee of a bill or note, who is in possession of it, or the bearer
thereof (NIL, Sec. 191).

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

3. Assignment – transfer of the title to the instrument, with the assignee generally taking only
such title as his assignor has, subject to all defenses available against the assignor.

MODES OF NEGOTIATION
 If Payable to bearer Negotiated by mere delivery
 If Payable to order Negotiated by the indorsement of the holder, completed by delivery

Delivery of negotiable instrument

Delivery means transfer of possession, actual or constructive, from one person or another
(NIL, Sec. 191). Delivery of an order instrument without indorsement if an order instrument is not
indorsed, the negotiation is incomplete and the instrument is in effect merely assigned. The transferee
acquires the right to have the indorsement of the transferor. It is only at the time of indorsement that
negotiation takes effect and the transferee acquires the rights of a holder (NIL, Sec. 49).
 NOTE: Where the instrument is no longer in the possession of the party whose signature
appears thereon, there is a prima facie presumption of a valid and intentional delivery by him (NIL,
Sec. 16).

(“Once a bearer, always a bearer” rule) A bearer instrument, when indorsed specially, may
nevertheless be further negotiated by delivery; but the person indorsing specially is liable as indorser
only to such holders who acquired title through his indorsement (NIL, Sec. 40).

ILLUSTRATION:

A makes a promissory note payable to bearer and delivers the same to B. B, however, endorses
it to C in this manner

Payable to C. Signed: B.”

Later, C, without indorsing the promissory note, transfers and delivers the same to D. The
note is subsequently dishonored by A. May D proceed against A for the note?
YES. D may collect from A. The note made by A is a bearer instrument. Where an instrument,
payable to bearer is indorsed, it may nevertheless be further negotiated by delivery. Despite the
special indorsement made by B, the note remained a bearer instrument and can be negotiated by
mere delivery. When C delivered and transferred the note to D, the latter became a holder thereof.
As such, D can proceed against A. NOTE: Once a bearer instrument, always a bearer instrument.

Indorsement
It is the signing of the name of the indorser on the instrument with the intent to transfer title
to the same. It must be in the instrument itself or in a paper attached to the instrument called allonge.
(NIL, Sec. 32). XPN: When the instrument has been paid in part. Indorsement to two or more
indorsees severally does NOT operate as a negotiation of the instrument.

 with the additional obligation that if the instrument is dishonored by non-payment or non-
acceptance, and notice is given to the endorser, the latter will pay for it.
 the indorsement must be of the entire instrument. Otherwise, the indorsement is not valid, but
would only constitute a valid assignment binding between the parties. REASON is that the
instrument must be delivered and there cannot be partial delivery of an instrument

Indorsement should be placed:

1. On the instrument itself; or

2. On a separate piece of paper attached to the instrument called “allonge” (NIL, Sec. 31)

Kinds of Indorsement
1. Special – Specifies the person to whom or to whose order the instrument is to be payable. It
is also known as specific indorsement, or indorsement in full. (NIL, Sec. 34).

NOTE: An instrument payable to bearer indorsed specially may nevertheless be negotiated

by delivery (once a bearer always a bearer) (NIL, Sec. 40).

GR: An order instrument needs indorsement for further negotiation.

 XPN: Sec. 40, NIL. If the instrument is originally a bearer and it was indorsed specially, it may
further be negotiated by mere delivery.

2. Blank – Specifies no indorsee.

a. Instrument is payable to bearer and may be negotiated by delivery (NIL, Sec. 34)

b. May be converted to special indorsement by writing over the signature of the indorser in
blank any contract consistent with the character of indorsement (NIL, Sec. 35)

NOTE: The indorsement need not follow the words of negotiability. What should follow the
words of negotiability is the promissory note or the bill of exchange but not the indorsmement.

Example: The indorsement may simply be written as “Pay to X” with the payee’s signature
instead of “Pay to the order of A”.

3. Restrictive - When the instrument:

a. Prohibits further negotiation of the instrument (it destroys the negotiability of the
instrument);

Example: Pay to Z only. Sgd P.

b. Constitutes the indorsee the agent of the indorser;

or Example: Pay to K for collection only. Sgd P.

c. Vests the title in the indorsee in trust for or to the use of some persons.

Example: Pay to A in trust for X.

NOTE: Mere absence of words implying power to negotiate does not make an instrument
restrictive (NIL, Sec. 36).

Indorsee has the following rights in a restrictive indorsement:

a) To receive payment of the instrument;

b) To bring any action thereon that the indorser could bring; and
c) To transfer his rights as such indorsee, where the form of the indorsement authorizes
him to do so All subsequent indorsees acquire only the title of the 1st indorsee under
the restrictive indorsement (NIL, Sec. 37)

An instrument negotiable in origin is always negotiable until paid, which is still true even if
the NI was dishonored or is already overdue, unless the instrument has been restrictively indorsed
or when discharged by payment or otherwise (NIL, Sec. 47).

4. Qualified– Constitutes the indorser a mere assignor of the title to the instrument made by
adding to the indorser’s signature words like, “without recourse”, “sans recourse” or “at the
indorsee’s own risk”. The indoresement serves as an ordinary equitable assignment.
NOTE: Qualified indorsement does not impair the negotiable character of an instrument (NIL,
Sec. 38) It only means that the qualified indorser is NOT liable when reason for dishonor are those
not provided under Sec. 65
 5. Absolute – The indorser binds himself to pay:

a. Upon no other condition than failure of prior parties to do so;

b. Upon due notice to him of such failure.

6. 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 (NIL, Sec. 39).

NOTE: The condition refers to the indorsement not on the instrument itself. The condition is
only between the conditional indorser and conditional indorsee.

Joint – Indorsement made payable to two or more persons who are not partners.

8. Irregular – A person who, not otherwise a party to an instrument, places thereon his
signature in blank before delivery (NIL, Sec. 64).

STRIKING
A holder may at any time strike out any indorsement which is not necessary to his title. The
endorser whose indorsement is struck out, and all endorsees subsequent to him, are thereby relieved
from liability on the instrument. (Section 48)

Pay to superman or order 25,000. When it is payable to the order of a Fictitious person or
non-existing person, and such fact was known to the person
sgd X making it so payable.

Pay to Y

Sgd Z

Pay to A

Sgd Y

To understand what instrument can be stricken out, ask yourself first what is the instrument? Is it a
bearer or an order?Then, after determining what instrument is that, you should ask yourself
whether how it is negotiated. Since a valid negotiation is necessary for you to acquire the title as a
holder.In the example above the instrument is a bearer one, it is negotiated by mere delivery.
Hence A may strike the indorsement of Z since it is not necessary to his title since its negotiation is
by mere delivery.
Negotiation by a prior party

Where an instrument is negotiated back to a prior party, such party may reissue and further
negotiate the same. However, he is not entitled to enforce payment thereof against any intervening
party to whom he was personally liable (NIL, Sec. 50).