THE LAW ON NEGOTIABLE CONTRACTS
 BILL OF EXCHANGE
 LAW APPLICABLE
 Act No. 2031, also known as Negotiable
Instruments Law. The law took effect on
June 02, 1911.
 NEGOTIABLE INSTRUMENT
 A written contract for the payment of money,
which by its form and on its face, is intended
as a substitute for money.
* There must be payment of money in the future.
 FUNCTIONS AND IMPORTANCE OF
NEGOTIABLE INSTRUMENTS
1. Use as substitute for money (ex. Checks)
2. Media of exchange for most commercial
transactions. (transactions that involves large
amount of money)
3. Serve as a medium of credit transactions. (For
Notes Payable or Notes Receivable)
 FEATURES OF A NEGOTIABLE
INSTRUMENT
1. NEGOTIABILITY - is the ability of the
instrument to be passed from one person to
another. In such a way that the last person
becomes the creditor.
* Ex. A promissory note. The one who will write
the promissory note will be the obligor or the
debtor or the passive subject. The receiver of
the promissory note will be the creditor or
obligee or active subject.
2. ACCUMULATION OF SECONDARY
CONTRACTS - One negotiable instrument
can accumulate many contracts along
the way until it will be paid.
* Ex. Mr. X made a promissory note for Mr. Y.
Mr. Y purchased supplies and used the
Promissory note as a payment to Mr. Z. Thus
accumulation of contracts promotes
COMMERCE OR TRADE for the economy.
 COMMON FORMS OF NEGOTIABLE
INSTRUMENTS
1. Promissory Note
2. Bill of Exchange
3. Check
 PROMISSORY NOTE
 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.
 PARTIES TO A PROMISSORY NOTE
1. MAKER - The one who is making the
instrument, issues and signs the Promissory
Note. Also called the debtor, obligor or the
passive subject.
2. PAYEE - Original creditor, entitled to receive
the payment. Later on the payee may transfer
the instrument to another person.
* The word “ORDER / BEARER” makes the
instrument negotiable.
 A negotiable bill of exchange is an
unconditional order in writing addressed
by one person to another, signed by the
person giving it, and requiring the person to
whom it is addressed to pay upon a
demand or at a fixed or determinable
future time a sum certain in money to
order or to bearer.
“ I will order a certain person to pay another.”
 PARTIES TO A BILL OF EXCHANGE
1. DRAWER - the one who is preparing the bill of
exchange. The person who is ordering another
person to pay.
2. PAYEE - the creditor.
3. DRAWEE - the one who will pay.
* Ex.
Pay Mr. X or bearer or order the sum of
50,000 on Dec. 31, 2022 or on demand.
To: Mr Z (Drawee) Signed: Mr. Y (Drawer)
 CHECK
 Is similar to a bill of exchange, except check
is drawn on a bank payable on demand.
 PARTIES TO A CHECK
1) DRAWER - the one drawing or issuing the
instrument.
2) PAYEE - the one to whom the instrument is
payable.
3) DRAWEE - the bank where the drawer has a
deposit.
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CHAPTER 1 pg. 10
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; (PM)
(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; (Christmas of 2022) Must
be payable to order or bearer; and (words of
negotiability )
(d) Where the instrument is addressed to a drawee,
he must be named or otherwise indicated therein
with reasonable certainty. (talks about bill of
exchange paper or a check)
* The moment it is conditional it is no longer
NEGOTIABLE.
SECTION 2
Certainty as to sum; what constitutes. -- The
sum payable is a sum certain within the meaning
of this act, although it is to be paid
(a) With interest; or
(b) By stated installments; or
(c) By stated installments, with a provision that
upon default in payment of any installment or of
interest the whole shall become due; or
(d) With exchange, whether at a fixed rate or at
the current rate; or
(e) With costs of collection or an attorney's fee, in
case payment shall not be made at maturity.
* the sum must be named
SECTION 3
*Unconditional Promise
Future and uncertain event - NON NEGOTIABLE
A promissory Note is still valid but not negotiable
* The Reimbursement - conditional -- If nag order ug
Bill of exchange pero walay money.
Instrument - Negotiable
SECTION 4
Determinable Future Time
SECTION 5
Additional Provisions
An instrument which contains an order or
promise to do any act in addition to the payment
of money is not negotiable. But the negotiable
character of an instrument otherwise negotiable
is not affected by a provision which
(a) Authorizes the sale of collateral securities in
case the instrument be not paid at maturity; or
(b) Authorizes a confession of judgment if the
instrument be not paid at maturity; or
(c) Waives the benefit of any law intended for the
advantage or protection of the obligor; or
(d) Gives the holder an election to require
something to be done in lieu of payment of
money.
But nothing in this section shall validate any
provision or stipulation otherwise illegal.
SECTION 6
OMISSIONS - DILI MAKA AFFECT SA VALIDITY
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.
SECTION 7
When it is payable on demand. The date is a must.
When payable on demand. —An instrument is
payable on demand—
(a) Where it is expressed to be payable on
demand, or at sight, or on presentation; or
(b) Inwhich no time for paymentis expressed.
Where an instrument is issued, accepted, or
indorsed when overdue, it is, as regards the
person so issuing, accepting, 6r indorsing it,
payable on demand.
SECTION 8
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 his
order. It may be drawn payable to the order of—
(a) A payee who is not maker, drawer, or drawee;
or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or more several payees; or
(f) The 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
SECTION 9
Sec. 9. When payable to bearer. — The
instrument is payable to bearer —
(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein
or bearer; or
(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; or
(d) When the name of the payee does not purport
to be the name of any person; or
(e) When the only or last indorsement is an
indorsement in blank.
 How do you negotiate a negotiable instrument?
-It depends.
If it is payable to order, It is negotiated by
endorsement with signature of the payee and
delivery.
If payable to bearer, negotiated by Mere Delivery.
SECTION 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.
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.
Sec. 12.
Ante-dated and post-dated. — The Instrument is
not invalid for the reason only that it is ante-
dated or post-dated, provided thisis not done for
an illegal or fraudulent purpose. The person to
whom an instrumentso dated is delivered
acquiresthe title thereto as ofthe date of delivery.
here the language of the instrument is
ambiguous, or there are omissions therein, the
following rules of construction apply:
(a) Where the sum payable is expressed in words
and also in figures and there is a discrepancy
between the two, the sum denoted by the words
is the sum payable; but if the words are
ambiguous or uncertain, reference may be had to
the figures to fix the amount;
(b) Where the instrument provides for the
payment of interest, without specifying the date
from which interest is to run, the interest runs
from the date of the instrument, and if the
instrument is undated, from the issue thereof;
(c) Where the instrument is not dated, it will be
considered to be dated as if the time it was
issued;
(d) Where there is a conflict between the written
and
printed provisions of the instrument, the written promise note but Mr. Daganta will be liable. Even if the
provisions prevail; signature of Mr. Daganta is not found in on the instrument, Mr
(e) Where the instrument is so ambiguous that Daganta will be liable as the principal.
there is doubt whether it is a bill or note, the
holder may treat it as either at his election; In case of forgery the forger is liable even if his signature does
(f) Where a signature is so placed upon the not appear on the instrument
instrument that it is not clear in what capacity the Ex. Mr. Daganta forge the signature of Dr. Labis -- Dr. Labis did
person making the same intended to sign, he is not issue and sign the promissory note but Mr. Daganta who
to be deemed an indorser; was familiar with the signature of Dr. Labis wrote the name Dr.
(g) Where an instrument containing the words "I Labis and signed using the signature of Dr. Labis so Mr. Daganta
promise to pay" is signed by two or more is the forger. Under the law Mr. Daganta will be liable even if
his name and real signature does not appear on the instrument
persons, they are deemed to be jointly and
because the forger even if his name the real name and
severally liable thereon.
signature is not found on the instrument he will be liable as
the forger
Sec. 18. Liability of person signing in trade or assumed name. -
No person is liable on the instrument whose signature does
not appear thereon, except as herein otherwise expressly
provided. But one who signs in a trade or assumed name will
be liable to the same extent as if he had signed in his own When the acceptor makes his acceptance on a bill on a
name. separate paper - applies to a bill of exchange; there are
three parties to a bill of exchange the drawer, the drawee,
and the payee
Relativity of contracts - the principle of relativity contracts is
Drawee is the one who is required to pay
that only the parties to a contract are bound by the terms
Drawer orders the drawee to pay the payee
of the contracts; only the parties of the contract as a
So the drawee is the person who is ordered to pay but as long
general rule are bound by the terms of the contract.
as the drawee does not sign the bill of exchange meaning to say
he does not agree, he does not accept the order of the drawer
How to know if they are the parties to a contract?
as long as he will not sign he will not be liable.
By looking at the contract itself to find out if they really signed
the contract; they participated in the contract by writing their
names and signing their own In order for the drawee to be liable on the bill of exchange
there must be acceptance, he must sign and put accepted and
then signed.
Remember: When a person issues a negotiable instrument,
Normally the acceptance is to be made on the instrument in
there is a presumption that there is a contract. One of the
the billl of exchange. However, there are rare times
features of negotiable instrument is the accumulation of
wherein the drawee will make his acceptance on a
secondary contracts so there is a primary contract when the
separate paper he would just write there accepted the bill
instrument was first issued and subsequent secondary
dated on that particular date with the following person
contracts. So there are several contracts if the instrument is
with the following details yell and he refer to the bill of
passed from one person to another.
exchange he will sign it on a separate paper we call it a
“ALLONGE” So the drawee even if he will accept in a
General rule: If a person's signature does not appear on the
separate paper, his signature does not appear on the bill
negotiable instrument he is not liable. Putting it the other way
of exchange but he will still be liable as one of the
only the persons whose signature appear on the face of the
exceptions.
instrument will be liable on the instrument.
When a person makes a written promise to accept a bill before
Exceptions:
it is drawn - so the drawee prior to the issuance by the
Where a person signs in a trade or assumed name so if a person
drawer already made a promise in a separate document
uses a trade name or an assumed name of course his real
or paper that he will accept the bill once the drawer will
name and signature will not appear in the instrument
issue; when the drawer will issue the document the
because he uses a trade name or a business name or an
signature of the drawee will not appear because his
assumed name, an alias
promise to accept a future bill was made on a separate
paper but he will still be liable.
Ex. Impeachment of former President Estrada, when he opened
a bank account in a certain bank and he deposited money he
Sec. 19. Signature by agent; authority; how shown. - The
signed the word Joseph Jose Bellarde. So even if he used the
signature of any party may be by a duty authorized agent. No
name Jose Bellarde he was held liable because there was a
particular form of appointment is necessary for this purpose
witness who told the impeachment court that it was then
and the authority of the agent may be established as in other
President Estrada who signed the instrument.
cases of agency.
If a person signs an instrument using his name or assumed
When a person signs as an agent he is not liable on the
name, his real name will not be pound on the instrument
instrument, it is the principal who is liable on the instrument.
but however he is still liable based on this section he is still
liable because he used his trade or assumed name or alias.
Sec. 20. Liability of a person signing as agent, etc. - Where the
The principal is liable if a duly authorized agent signs on his own
instrument contains or a person adds to his signature words
behalf
indicating that he signs for or on behalf of a principal, or in a
Contract of agency - one person called the principal authorizes
representative capacity, he is not liable on the instrument if
another to enter into a transaction; the principal authorize
he was duly authorized; but the mere addition of words
his agent to issue a promissory note, so the agent issued a
describing him as an agent, or as filling a representative
promissory note and signed it as an agent of the principal
character, without disclosing his principal, does not exempt
therefore under the principles of agency it is not the
him from personal liability.
agent who will be liable it is the principal.
Ex. Atty. Perez authorized Mr. Daganta for him to be hi agent,
Ex. Mr. Daganta authorized Miss Farah to issue a promissory
so Mr. Daganta signed it stating in behalf or as an agent of Atty.
note and Miss Farah issued the promissory note and signed as
Perez will make Mr. Daganta not be liable but Atty. Perez will
agent of Mr. Nelson Daganta. Mr. Daganta did not sign the
be the one liable. But if wala gi state nga agent si Mr. Daganta
ni Atty. Perez, Mr. Daganta will be liable.
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.
If the agent signed per proc or per procuration that is a warning
to anybody dealing with the agent that the authority of the
agent is limited.
Ex. I authorized Mr. Daganta to issue a promissory note but
only up to 20,000 pesos. If Mr. Daganta sign per proc it is the
duty of any person dealing with Mr. Daganta to inquire as to
the extent of his authority because if later on it turned out that
the check of let us say 30,000 issued by Mr. Daganta will again
turn out not authorized then I will not be liable but Mr.
Daganta will be liable.
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.
What is the effect if a minor will endorse the instrument?
One of the pictures of negotiable instrument is that it can be
passed from one person to another.
So let us say while being passed from one person to another, A
issued a promissory note in favor B. B endorse it to C, C to D
and then D is a minor or a corporation and then D endorse it to
E, E to F. So in between any of the transactions one of the
endorsers is a minor or a corporation, even if a person is a
minor or a corporation it will not affect the validity of the
instrument but the person the minor will have a limited
liability.
(SKIP) Sec. 23. Forged signature; effect. - 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 discharged
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.
Sec. 18. Liability of person signing in trade or assumed name. -
No person is liable on the instrument whose signature does
not appear thereon, except as herein otherwise expressly
provided. But one who signs in a trade or assumed name will
be liable to the same extent as if he had signed in his own
name.
Relativity of contracts - the principle of relativity contracts is
that only the parties to a contract are bound by the terms
of the contracts; only the parties of the contract as a
general rule are bound by the terms of the contract.
How to know if they are the parties to a contract?
By looking at the contract itself to find out if they really signed
the contract; they participated in the contract by writing their
names and signing their own
Remember: When a person issues a negotiable instrument,
there is a presumption that there is a contract. One of the
features of negotiable instrument is the accumulation of
secondary contracts so there is a primary contract when the
instrument was first issued and subsequent secondary
contracts. So there are several contracts if the instrument is
passed from one person to another.
General rule: If a person's signature does not appear on the
negotiable instrument he is not liable. Putting it the other way
only the persons whose signature appear on the face of the
instrument will be liable on the instrument.
Exceptions:
Where a person signs in a trade or assumed name so if a person
uses a trade name or an assumed name of course his real
name and signature will not appear in the instrument
because he uses a trade name or a business name or an
assumed name, an alias
Ex. Impeachment of former President Estrada, when he opened
a bank account in a certain bank and he deposited money he
signed the word Joseph Jose Bellarde. So even if he used the
name Jose Bellarde he was held liable because there was a
witness who told the impeachment court that it was then
President Estrada who signed the instrument.
If a person signs an instrument using his name or assumed
name, his real name will not be pound on the instrument
but however he is still liable based on this section he is still
liable because he used his trade or assumed name or alias.
The principal is liable if a duly authorized agent signs on his own
behalf
Contract of agency - one person called the principal authorizes
another to enter into a transaction; the principal authorize
his agent to issue a promissory note, so the agent issued a
promissory note and signed it as an agent of the principal
therefore under the principles of agency it is not the
agent who will be liable it is the principal.
Ex. Mr. Daganta authorized Miss Farah to issue a promissory
note and Miss Farah issued the promissory note and signed as
agent of Mr. Nelson Daganta. Mr. Daganta did not sign the
promise note but Mr. Daganta will be liable. Even if the
signature of Mr. Daganta is not found in on the instrument, Mr
Daganta will be liable as the principal.
In case of forgery the forger is liable even if his signature does
not appear on the instrument
Ex. Mr. Daganta forge the signature of Dr. Labis -- Dr. Labis did
not issue and sign the promissory note but Mr. Daganta who
was familiar with the signature of Dr. Labis wrote the name Dr.
Labis and signed using the signature of Dr. Labis so Mr. Daganta
is the forger. Under the law Mr. Daganta will be liable even if
his name and real signature does not appear on the instrument
because the forger even if his name the real name and
signature is not found on the instrument he will be liable as
the forger
When the acceptor makes his acceptance on a bill on a
separate paper - applies to a bill of exchange; there are
three parties to a bill of exchange the drawer, the drawee,
and the payee
Drawee is the one who is required to pay
Drawer orders the drawee to pay the payee
So the drawee is the person who is ordered to pay but as long
as the drawee does not sign the bill of exchange meaning to say
he does not agree, he does not accept the order of the drawer
as long as he will not sign he will not be liable.
In order for the drawee to be liable on the bill of exchange
there must be acceptance, he must sign and put accepted and
then signed.
Normally the acceptance is to be made on the instrument in
the billl of exchange. However, there are rare times
wherein the drawee will make his acceptance on a
separate paper he would just write there accepted the bill
 dated on that particular date with the following person
with the following details yell and he refer to the bill of
exchange he will sign it on a separate paper we call it a
“ALLONGE” So the drawee even if he will accept in a
separate paper, his signature does not appear on the bill
of exchange but he will still be liable as one of the
exceptions.
When a person makes a written promise to accept a bill before
it is drawn - so the drawee prior to the issuance by the
drawer already made a promise in a separate document
or paper that he will accept the bill once the drawer will
issue; when the drawer will issue the document the
signature of the drawee will not appear because his
promise to accept a future bill was made on a separate
paper but he will still be liable.
Sec. 19. Signature by agent; authority; how shown. - The
signature of any party may be by a duty 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.
When a person signs as an agent he is not liable on the
instrument, it is the principal who is liable on the instrument.
Sec. 20. Liability of a person signing as agent, etc. - 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.
Ex. Atty. Perez authorized Mr. Daganta for him to be hi agent,
so Mr. Daganta signed it stating in behalf or as an agent of Atty.
Perez will make Mr. Daganta not be liable but Atty. Perez will
be the one liable. But if wala gi state nga agent si Mr. Daganta
ni Atty. Perez, Mr. Daganta will be liable.
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.
If the agent signed per proc or per procuration that is a warning
to anybody dealing with the agent that the authority of the
agent is limited.
Ex. I authorized Mr. Daganta to issue a promissory note but
only up to 20,000 pesos. If Mr. Daganta sign per proc it is the
duty of any person dealing with Mr. Daganta to inquire as to
the extent of his authority because if later on it turned out that
the check of let us say 30,000 issued by Mr. Daganta will again
turn out not authorized then I will not be liable but Mr.
Daganta will be liable.
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.
What is the effect if a minor will endorse the instrument?
One of the pictures of negotiable instrument is that it can be
passed from one person to another.
So let us say while being passed from one person to another, A
issued a promissory note in favor B. B endorse it to C, C to D
and then D is a minor or a corporation and then D endorse it to
E, E to F. So in between any of the transactions one of the
endorsers is a minor or a corporation, even if a person is a
minor or a corporation it will not affect the validity of the
instrument but the person the minor will have a limited
liability.
(SKIP) Sec. 23. Forged signature; effect. - 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 discharged
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.
Section 24. Talks about consideration in our
discussion in law 301, remember the three
requisites of contracts consent object and cost
or consideration. The third requisite of a contract
is cost or consideration. Now there is a
presumption. Under section 24 that
whenever a person will issue a negotiable
instrument he receives something.
Example:
Let us say I am the maker so I issued a
promissory note. I promise to pay mr. nelson
daganta the sum of ten thousand pesos mr
daganta order the sum of ten thousand
pesos. On december 31, 2022 I gave the
promissory note to mr daganta.
There is a presumption that I received something
in return. In fact some promissory
note for the cell phone i received i promise to pay
mr taganta or for value receive I promise to pay
mr daganta. But what if I promise to pay Mr
Daganta or order? Is the instrument the
promissory note a valid promissory note? YES.
because of section 24.
Section 24 tells us that consideration is
presumed. So every negotiable instrument is
deemed prima facie.
We introduce evidence to prove to the contrary.
Prima facie to have been issued for a valuable
consideration and every person whose signature
appears their own to have become a party there
too for value.
“i issued the promissory note to mr daganta“ So,
there is a presumption that i received
something from Mr. Daganta and then later on
Mr. Daganta endorsed the instrument to Dr.
Labis. So there is a presumption that mr daganta
received something from dr labis
because he endorsed the promissory note to Dr.
Labis and then later on Dr. Labis
endorsed the instrument to Mr. Tempurada. So
there is a presumption that Dr. Labis
received something from Mr. Tempurada and so
on because whenever a negotiable
instrument is issued or endorsed, the law
presumes that there is consideration and that law
is section 24.
Section 25. value is any consideration sufficient
to support a simple contract.
In law and obligations and contracts
consideration maybe things, money or some
other things. Maybe rights or services.
“For those issuing a promissory note in favor of
liceo although the promissory note is
that negotiable, the thing or the consideration
there is the services provided by the
Liceo. In exchange for payment for the issuance
of the promise or not the students will
receive education services.”
When they put an antecedent or pre-existing debt
that constitutes value and is such
whether the instrument is payable on demand or
at a future time.
In your accounting sometimes there are
accounts payable and you pay the accounts
payable by issuing a note so in exchange for the
accounts payable you issued a note.
So, that is an antecedent or pre-existing debt.
So, if you are the payee or the creditor,
you have an account receivable and it will be
replaced by a note receivable.
Section 26. Where value has at any time been
given for the instrument the holder isdeemed a
holder for value in respect to all parties who
became such prior to that time.“If you give
something valuable, you give it consideration.
You are considered a holder for value.
Section 27. Where the holder has lien on the
instrument arising either from a contractor by
implication of law he is deemed a holder for
value to the extent of his lien.
“When you say a lien, you have a right to
possess or to hold the instrument.”
A holder for value can also be considered that a
holder was a lien on the instrument and his lien
will be up to the extentOf his right on the
instrument.
Section 29. Liability of accommodation party.
A person who issues a promissory note or a bill
of exchange is presumed to have received
something.
CHAPTER IV
RIGHTS OF THE HOLDER
Sec. 51. Right of holder to sue; payment. – The
holder of a negotiable instrument may sue
thereon In his own name; and payment to him in
due course discharges the instrument.
Classes of holders.
The holder of a negotiable instrument means the
payee or indorsee of a bill or note, who is in
possession of it or the bearer thereof. (Sec. 191,
par. 7.) Thus, the term includes not only persons
possessing bearer instruments but also payees
and indorsees possessing order instruments in
an ascending order of rights, the classes of
holders:
Are:
(1) Holders simply (Sec. 51.);
(2) Holders for value (see Sec. 26.); and
(3) Holders in due course. (Secs. 52, 57.)
Ordinary holder or mere holder.
A person who qualifies as a holder but does not
meet all the conditions to qualify as a holder in
due course is called ordinary holder or mere
holder (or assignee or transferee).
In the hands of any holder other than a
holder in due course,, a negotiable
instrument is subject to any and every
defense or defect in the instrument,
whether real or personal (see Sec. 58.),
as if it were non-negotiable. However, it
does not mean that an instrument in the
hands of such holder is non-negotiable.
Under Sections 58 and 59, a holder who
is not himself a holder in due course but
derives his title from a holder in due
course is given the rights of such prior
hholder
(2) The holder of a negotiable instrument
is not necessarily the owner thereof. For
example, a thief who steals a bearer
paper, is a holder but obviously he is not
the owner, although he can legally
transfer (negotiate) the same to an- other,
who then becomes the new holder.
Rights of holder in general.
In general, the following are the rights of a
holder:
(1) He may sue on the instrument in his name;
and
(2) He may receive payment and if the payment
is in due course (see Sec. 88.), the instrument is
discharged. (Sec. 119.)
Under Section 51, a holder even though he be a
holder only for collection may sue in his own
name. Similarly, the pledgee of a note may sue
as he is deemed "holder" within this section.
Right of transferee of unindorsed instrument
to sue.
The authorities are not uniform as to the
question of whether the transferee of an
unindorsed instrument may sue in his own
name. A transferee of unindorsed instrument is
certainly not a "holder" as defined by Section
191. It is believed, never- theless, that he may
do so. If "the transfer vests in the transferee
such title as the transferor had" (Sec. 49.) and if
the transferor had legal title, this must pass by
the transfer álthough subject to defenses.
(Beutel's Brannan, op. cit., p. 467.)
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.
Conditions to qualify one holder in due
course.
A holder in due course is a holder who took the
instrument under the conditions enumerated in
Section 52. He takes the instrument free of most
defenses or adverse claims to it by other parties.
(1) Presence of all conditions. - All the four
conditions must concur in order to qualify a
person as a holder in due course. If any one of
them is absent, the holder cannot be considered
a holder in due course. Every holder is generally
deemed prima facie a holder in due course.
(Sec. 59.) He who claims otherwise has the
burden of proof.
(2) Status as mere assignee. - The holder of a
non-negotiable instrument (such as a simple
contract) cannot attain the status of a holder in
due course. He is a mere assignee subject to
defenses, acquiring no better rights under the
contract than those possessed by the assignor.
The fact that the instrument is non-negotiable is
a sign of warning to a prospective purchaser and
places him on his guard and on inquiry. A
transferee who receives an instrument other
than by issue or negotiation (see Secs. 30, 191,
pars. 7, 8, 10.) cannot acquire the status of a
holder in due course regardless of the other
circumstances under which his acquisition of the
instrument took place.
(3) Rights of holder in due course/not in due
course. A holder who is not a holder in due
course has all the rights every of the latter
except that the instrument is subject to available
defense as if it were non-negotiable. (see Sec.
58.) On the other hand, a holder in due course,
is afforded most- favored status under the law.
He takes the instrument free of many defenses
that exist between the original parties. Thus, it is
possible for a holder in due course to acquire
greater rights under a negotiable instrument
possessed by the payee/indorser.
EXAMPLE:
M buys a machine from P for P20,000 under an
installment contract. After delivery, P assigns his
right under the contract (to collect the price) to
A. The machine turns out to be defective. M can
successfully assert this fact as a defense
against A just as he could have asserted it
against P had there been no assignment. The
same could be true if M had simply given a non-
negotiable note. The rights acquired by A are
those possessed by P, no more and no less. On
the other hand, if M had given P a negotiable
note (or check) in payment of the machine, and
A acquired the note under circumstances that
qualified him as a holder in due course, then A
would be entitled to recover the full amount of
the note given by M despite the fact that P had
violated his contract with M. Similarly, a mere
assignee, like an ordinary holder, can enforce
the instrument against the primary party if the
latter has no defense available to him.
Payee as holder in due course.
There is a marked conflict of opinion on this
point.
(1) Contrary view. Those who hold the negative
view contend that under subsection (d) of
Section 52, the holder in due course must have
acquired the instrument through negotiation and
an instrument is issued and not negotiated to a
payee. (Bretton Mill Co. v. Willims, 184 N.W.
265.)
(2) Affirmative view.. The other view holds that a
payee may be a holder in due course under any
of in which he meets the requirements of
Section 52. Since "holder," as defined in Section
191, includes a payee who is in possession, the
word "holder" in the first clause of Section 52
and in the second subsection may be replaced
by the definition in Section 191 so as to read: "a
holder in due course is a payee or indorsee who
is in possession," etc. (see De Ocampo vs.
Gatchalian, 3 SCRA 596; see comments under
Sec. 30.)
EXAMPLE:
W delivered to H, husband, a check made
payable to P, a creditor of W, with instruction to
pay her debt with it. H handed the check to P as
a payment upon debt of his own to P who
accepted it as such in good faith. It was held that
P was a holder in due course. (Brannan, op. cit.,
p. 680; Boston Steel & Iron Co. v. Steuer, 66
N.E. 646.) In this situation, P qualifies as a
holder in due course if he gave value for the
check, took if before it was overdue, and without
notice of the lack of authority on the part of H.
Drawee as holder in due course.
While a payee may be a holder in due course, a
drawee does not, by paying a bill, become a
holder in due course under this section. A holder
refers to one who has taken the instrument as it
passes along in the course of negotiation
towards the drawee and not the drawee who, on
the acceptance and payment of the instrument,
thereby strips it of all negotiability and reduces it
to a mere voucher or proof of payment. (Nat.
Bank of Commerce v. Seattle Nat. Bank, 187
Pac. 342.)
Instrument complete and regular upon its face.
Wanting in any material particular. - An
instrument is incomplete when it is
wanting in any material particular or
particular proper to be inserted in a
negotiable instrument without which the
same will not be complete. (see Sec. 14
for examples of incomplete instrument.)
The taking of an incomplete instrument
puts the purchaser on inquiry as to why it
is incomplete. If he fails to do so, he takes
the instrument subject to all defenses.
(2) Alteration apparent on face of
instrument - The instrument must also be
regular upon its face. The most common
type of irregularity is an alteration in the
instrument. To render the instrument
irregular under Section 52(a), the
alteration must be visible or apparent on
the face of the instrument, for if it is not
apparent, the matter is governed solely
by Section 124 which renders the
instrument void.
EXAMPLES: The following are not complete
and regular upon its face:
(a) An instrument payable "on or before...
after date,"
(b) A bill dated "August 1, 2013" and payable
"December 1" but not naming the year of
maturity; and
(c) An instrument blank as to payee or
acceptor or drawee. Holder before
instrument is overdue.
(1) Date of maturity. - An instrument is overdue
after the date of maturity.
(a) The date of maturity is the time fixed
therein. (see Secs. 4, 85.)
(b) If the instrument is payable on demand
(Sec. 7.), the date of maturity is determined by
the date of pre- sentment. (see Secs. 71,
143[a].)
(c) If the instrument is payable on the
occurrence of a specified event which is certain
to happen, the date of maturity is fixed by the
happening of the event. (Sec. 4[c].)
(2) Acquisition of instrument afterlon date of
maturity A negotiable instrument in circulation
past its maturity date carries strong indication
that it has been dishonored. But one taking an
instrument on the date of maturity takes before
maturity because the principal debtor has the
whole day to pay. Hence, it cannot be
considered as notice that the instrument has
been dishonored.
Holder without notice of dishonor.
(1) Ways and time of dishonor. - An instrument
may be dishonored either by non-acceptance
(see Sec. 149.) or by non-payment. (see Sec.
83.) Dishonor by non-acceptance refers only to
a bill of exchange. While dishonor by non-
payment can only take place at the time of
maturity, dishonor by non-acceptance of a bill
may occur even before the date of its maturity.
EXAMPLE:
Suppose R draws a bill for P10,000 payable to
the order of P addressed to W as the drawee.
The bill is payable on September 20, 2013. P
presents the bill for acceptance on September 1,
2013, but W refuses to accept. When a bill is
dishonored by non-acceptance all that the
drawee has to do is to so inform the holder that
he does not accept the bill. Hence, the fact of
dishonor may not appear on the face of the bill.
But if P negotiates the bill to A who knows that
the bill has been previously dishonored by non-
acceptance, A cannot be a holder in due course.
(2) Negotiation after maturity or dishonor. An
overdue or dishonored instrument may still be
negotiated either by indorsement or by delivery
to the same extent as before maturity (see Sec.
47.) but in the case of the former, the holder
cannot be a holder in due course (Sec. 52[b].)
while in the case of the latter, the holder without
notice can be ah in due course. (ibid.)
THE LAW ON NEGOTIABLE INSTRUMENTS
(1) Meaning of good faith.
-It means “honesty in fact the transaction
concerned.” Each situation must be examined
separately to determine good faith. The negative
test is that a holder acted with good faith if bad
faith is not present. In any case, the test of good
faith (or bad faith) is subjective.
The words “in good faith” under Section 52©
refer only to the good faith of the indorsee or
transferee and not to the seller of the paper.
2.) Meaning of bad faith. – Under Section 56, it
means that he must have knowledge of facts
which render it dishonest for him to take a
particular piece of negotiable paper
Proof of bad faith. – To show knowledge
of such Facts that the taking would
amount to bad faith, it is not necessary to
show knowledge of the exact truth. It is
sufficient that such knowledge tends to
show that there was something wrong
with the transaction.
EXAMPLE:
X represented himself as the agent of P in the
sale of a Painting allegedly owned by P. R, a
prospective buyer, issued A crossed check (see
Sec. 185.) upon request of X for P6,000 Payable
to P on the understanding that the check was to
b shown only to P as evidence of R’s good faith
to purchase the Car. Instead, X paid the check
to P for the hospital bill of X’s wife in P’s clinic
and was given P1,560.25 as change. May P be
considered a holder in due course and, hence,
Entitled to recover from R? No. Although P was
not aware of the circumstances unDer which the
check was delivered to X by R, P was guilty Of
gross neglect (see Sec. 56.) amounting to legal
absence of Had no obligation with P, that the
amount of the check did not Good faith since the
surrounding circumstances, i.e., that R
Correspond exactly with the obligation of X to P
and that the check is a crossed check, which
means that the check could only be deposited
but may not be converted into cash. These
circumstances should have put P on inquiry as
to the why and wherefore of the possession of
the check by X and why he used it to pay his
account to P. (De Ocampo vs. Gatchalian, 3
SCRA 596 [1961].)
Holder for value.
Any consideration sufficient to support a simple
contract is value. (Sec. 25.) It is not necessary
that the consideration should be adequate. (see
Art. 1355, Civil Code.) But love and affection do
not constitute value within the meaning of the
tlaw. (Cockrell v. Mckenna, 48 A.L.R. 234.)
Thus, the purchase of an instrument at a
discount does not necessarily prevent one from
being a bona fide holder especially if the
financial condition of the issuer of the instrument
is not well-known. However, where the discount
is unusually large, this fact, together with other
facts, maybe material on the question of good
faith.
Holder without notice of infirmity in
instrument or defect of title.
(1) Lack of bad faith.
Under Section 56, in order to constitute notice,
the holder must have had actual or chargeable
knowledge of the infirmity or defect (see Sec.
55.) or must have had acted in bad faith. This
absence of knowledge and lack of bad faith is
the essential basis that renders one a holder in
due course. Notice that the instrument has been
dishonored or any defense against the
instrument after instrument has been acquired
does not prevent a holder from qualifying as a
holder in due course.
EXAMPLE:
If P steals from M, maker, a note payable to
bearer and negotiates it to A who has notice of
the theft, A cannot be a holder in due course.
However, if A acquires the note before he has
notice of the theft, A will still be considered a
holder in due course assuming the other
condition are present.
Section. 54 Notice before full amount paid. –
where the transferee receives notice of any
infirmity in the instrument or defect in the title of
the person negotiating the same before he had
paid the full amount agreed to be paid therefor, he
will be deemed a holder in due course only to the
extent of the amount theretofor paid by him.
Effect of notice before full payment.
No amount has been yet paid – where an
instrument has been taken but the purchaser
has not yet paid anything, and he receives
notice of infirmity in the instrument or defect
in the title of the holder, he is relieved from
the obligation to make payment. If he does so,
so it is quite clear that he is not entitled to the
same protection as a holder in due course.
An amount has been paid - where an
instrument has been transferred to him in
consideration of his promise to make future
payments to his transferor, he is under no
legal obligation to pay the balance of the
amount he has agreed to pay on discovering
the infirmity or defect. If he does, he can be
considered a holder in due course only to the
extent of the amount theretofore paid by him.
Example:
A promissory note for 10,000 signed by M, as
maker, and payable to bearer is delivered to P in
payment of goods sold. The goods were not delivered
to M by P and, therefore, there was a failure of
consideration. P indorsed the note to A upon the
terms of payment of 6,000 and the balance in a
month. Before A could pay the balance of 4,000, A
received notice of the defect in the title P.
Under these circumstances, A is a holder in
due course to the extent of 6,000, the amount paid by
him before he learned of P’s defective title but not as
to the 4,000 balance, although he pays it later on.
Sec. 55 When title is defective. – The title of a
person who negotiates an instrument is defective
within the meaning of this Act when he obtained
the instrument, or any signature thereto, by fraud,
duress, or force and fear, or other unlawful
means, or for an illegal consideration, or when he
negotiates it in breach of faith, or under such
circumstances as amount to a fraud.
When title of a person defective.
The title of a person who negotiates and
instrument is defective under Section 55 in two ways,
namely:
In the acquisition; or
In the negotiation
Under the first, it means he obtained the instrument
or any signature thereto by fraud, duress, or force and
fear or other unlawful means, or for an illegal
consideration. Under the second, it means he
negotiated the instrument in breach of faith, or under
such circumstances as amount to a fraud. Duress or
force and fear include all acts which overcome the
signer’ will.
Examples:
Fraud- brokers employed to buy stock
represented that they bought the stock and
received a check therefor, but they had not, in
fact, bought. It was held that their title to the
check was defective because the obtained it
by means of fraud. (People State Bank v.
Miller, 185 Mich. 565.)
Duress, or force and fear – where A, by the
use of violence and intimidation, forced P to
indorse a promissory note in favor of A.
Other unlawful means – where the
instrument had been stolen. It has been held
that a person who acquires and instrument by
indorsement of a part thereof gets title by
unlawful means since the transfer is in
contravention of the law. (Edgar v. Haines,
141 N.E. 837.)
Illegal consideration – a note given to stifle a
criminal prosecution or in consideration of the
payee killing a person is invalid.
Negotiation in breach of faith – where the
payee of a notes negotiated it after receiving
payment from the maker (Delancy v.
Brownwood, 213 Pac. 578.); where the payee
transfers the instrument in breach of
agreement (Silverman v. Cates, 211 N.Y.
Supp. 491.); where a note is given in payment
of goods to be delivered and the note is
negotiated without delivery of the goods
(Glend State Bank v. Abbot, 216 Pac, 100.);
or where a note merely as collateral or
security is negotiated. (Bell v. McDonald, 139
N.E. 613.)
Circumstances amounting to fraud – where
the payee of a note negotiated it after being
told that the maker intends to resist payment
or that the transferor had no legal right to
transfer.
Sec. 56. What constitutes notice of defect. – To
constitute notice of an infirmity in the instrument
or defect in the title of the person negotiating the
same, the person to whom it is negotiated must
have had actual knowledge of the infirmity or
defect, or knowledge of such facts that his action
in taking the instrument amounted to bad faith.
What constitute notice of infirmity or defect.
In order to constitute notice, the transferee
must have actual knowledge of the infirmity or
defect, or knowledge of such facts (which do not
appear on the face of the instrument) that his action in
taking the instrument amounts to bad faith. Actual
knowledge is usually shown by the instrument itself.
Mere negligence to make inquires not
sufficient – under sections 54 and 56,
negligence in itself is not sufficient to
constitute notice since it is not the equivalent
of either actual knowledge or bad faith. The
question of bad faith or good faith is mostly a
question of fact. Mere suspicious
circumstances are not enough. Thus,
consulting an attorney before taking a note
does not show bad faith. (Kelomitz v. Jansen,
226 Pac 1023.) Nor does the fact that the
payee indorses “without recourse” constitute a
badge of guilty knowledge, (Continental Nat.
Bank v. Cole, 51 Idaho 140.)
Knowledge amounting to bad faith – there
is difference, however between the existence
of suspicious circumstances, on the one hand,
and actual suspicion of the holder, on the
other. “If the holder had actual knowledge of
suspicious circumstances, coupled with the
means of readily informing himself of the
facts and he willfully abstained from making
inquiries, his intentional ignorance may
amount to bad faith.” (Hess v. Iowa Bankers’
 Mort. Co., 201 N.W. 91; see De Ocampo &
Co. vs. Gatchalian, 3 SCRA 596; Sec. 52 [c].)
Thus, the purchaser who takes the instrument
after being told that the maker intends to resist
payment or that the transferor has no legal
right to transfer (though honestly believing
that the law would sustain the transfer) cannot
be held a holder in due course. (Babb &
Martin, op. cit., 216.)
Also, while inadequacy of price is not of
itself, sufficient to show bad faith, the
inadequacy may be so gross as to justify a
finding of bad faith as where one paid 1,000
for a note of 10,000 the solvency and credit of
the maker being well-known.
Effect of notice of defect – knowledge or
chargeable notice of any defect, at the time of
taking of an instrument, which destroys the
status of a holder as a holder in due course,
open all defenses otherwise cut off against
him and not merely that relating to the defect
of which he had notice. (See Sec. 58.) Thus, a
holder with knowledge of failure of
consideration is subject to the defense that a
note was obtained by fraud.
Sec. 57. Rights of holder in due course.A
holder in due course holds the Instrument free
from any defect of title of prior parties, and
free from de- fenses available to prior parties
among themselves, and may enforce payment
of the instrument for the full amount thereof
against all parties liable thereon. Rights of a
holder in due course.
The following are the rights of a holder in due
course
(Sec. 51.);
(1) He may sue on the instrument in his own
name
(2) He may receive payment and if the payment is
in
due course, the instrument is discharged (ibid.);
(3) He holds the instrument free from any defect
of
title of prior parties;
(4) He holds the instrument free from defenses
available
to prior parties among themselves; and
(5) He may enforce payment of the instrument for
the
full amount thereof against all parties liable
thereon.
Real defenses available against
a holder in due course.
The defenses referred to in Section 57 that
cannot be set up against a holder in due course
are the so-called "personal defenses" or equities,
as distinguished from absolute or real
defenses. They are cut off by negotiation of the
instrument to a holder in due course. This
rule which permits a holder in due course to take
an instrument free of all personal defenses
is a necessity if commercial papers are to
circulate freely and prospective purchasers are
to
accept them routinely and willingly. Real
defenses, which to the instrument itself, would
be
available against all persons even as against a
holder in due course. (see Sec. 58.)
A holder not a holder in due course acquires the
instrument subject to all defenses, whether
personal or real, because he is treated as a mere
assignee of a non-negotiable paper.
Sec. 58. When subject to original defenses. 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 illegality
affecting the instrument, has all the
rights of such former holder in respect of all
parties prior to the latter.
Immediate, remote, and prior
parties.
By way of illustration:
(1) Assume that M makes and delivers a
promissory note to P, and P indorses to A, and A
to B. M and P are said to be immediate parties
because they are in direct contractual
relation with each other. The same is true of P
and A, and A and B
(2) In the preceding example, M and B are remote
parties, that is, parties who were not in
direct contractual rela- tion to each other. Other
pairs of remote parties are M and A, and P
and B.
(3) In the first example above, M, P, and A are
prior parties with respect to B.
Meaning of defenses.
Defenses are grounds or reasons pleaded or
offered by the defendant in a case, showing
why the plaintiff, as a matter of law or fact,
should not be given the relief he seeks.
Kinds of defenses.
There are two (2) kinds of defenses which may be
inter- posed to an action upon a
negotiable instrument: real, absolute or universal
defenses and personal, limited, or
equitable defenses.
(1) Real defenses are those that are assertable
against all parties, both immediate and
remote, including holders in due course or
holders through the latter. In other words,
there are cases when a holder in due course is
not legally entitled to payment from the
primary party. They are called "real" because
they attach to the res, that is, the instrument
itself regardless of the merits or de- merits of the
holder. (Ogden, op. cit., p. 309.) They
challenge the validity of the instrument itself.
This does not imply, however, that the
instrument is valueless and can never be
enforced. It is only unenforceable against the
party entitled to set up the defense (e.g., maker's
defense that he was infant when he
executed and delivered the instrument sued on
or that his signature thereon is a forgery)
but not against those to whom such a defense is
not available such as, in the case of
forgery, persons precluded from setting it up.
(Sec. 23.)
(2) Personal defenses are those available to prior
parties among themselves but which are
not good against a holder in due course. (see
Sec. 57.) They include every defense
available in actions under ordinary contract law.
They can be asserted only against ordinary
holders, but not against holders in due course or
holders with all the rights of a
holder in due course. They are so-called because
they are available only against that
person or subsequent holder who stands in
privity with the party seeking to enforce it. In
other words, they can be used only between
original parties or imme- diate parties or
against one who is not a holder in due course.
Note that while a real defense questions the legal
validity of the instrument itself, a personal
defense affects only the validity of the agreement
for which the instrument was issued. The
validity of the instrument is recognized. It is the
underlying agreement that is in question.
Examples of defenses.
(1) Real defenses:
(a) Incapacity as far as the incapacitated person
is concerned (see Art. 1327, Civil Code.);
(b) Illegality of contract when declared by law
(see Art. 1409, ibid.), except where the maker
or drawer is himself a party to its illegality; thus,
a note for a gam- bling debt (an illegal
consideration) is a mere personal defense (see
Sec. 55.);
(c)Want of delivery of incomplete instrument
(Seg. 15.);
(d) Forgery (Sec. 23.);
(e) Want of authority, apparent and real (ibid.);
(f) Duress amounting to forgery as where one
takes the hands of another and forces him at
gunpoint to sign his name. There are varying
degrees of dures under the law. It, for
example, a person signs his name under a vague
threat or through fear of economic retalf.
arion, the defense is only personal in nature. The
duress must be so overwhelming that the
victim is entirely de prived of his will.
(g) Fraud in factum or fraud in esse contractus
(Sec. 14.);
(h) Fraudulent alteration by holder (Secs. 124, 1st
sentence; 125.);
(i) Prescription (see Arts. 1140-1142; 1144-1147,
Civil Code.);
(j) Other infirmities appearing on the face of the
instrument (Sec. 52.); and
(k) Discharge at or after maturity. (Secs. 88, 118,
121, 122.)
(2) Personal defenses:
(a) filling of wrong date (Sec. 13.);
(b) filling up of blanks not in accordance with the
authority given and within reasonable time
(Sec. 14.); 16.):
(c) want of delivery of complete instrument (Sec.
(d) absence or failure of consideration (Sec. 28.);
(e) simple fraud or fraud in inducement (Sec. 55.)
(f) acquisition of instrument (not signature) by
dur ress, or force and fear (ibid.):
(g) acquisition of instrument by unlawful means
(ibid.);
(h) acquisition of instrument for an illegal
consideration (ibid.);
(i) negotiation in breach of faith (ibid.);
(j) negotiation under circumstances that amount
to fraud (ibid.);
(k) innocent alteration or spoliation. (see Secs.
124 (last sentence], 125.) Spoliation is an
alteration made by a stranger to an instrument. If
the original meaning can be ascertained,
the holder in due course may recover ac- cording
to its original tenor;
(I) set-off between immediate parties (see Sec.
58.);
(m) discharge by payment or renunciation or
release before maturity (Secs. 50, 121, 122.);
(n) discharge of party secondarily liable by
discharge of prior party (Sec. 20[c].); and
(o) want of authority of the agent who has appa-
rent authority (see Art. 1869, Civil Code.),
but if the principal can show that the agent had
no express, implied, or apparent authority to
sign, the defense is real.
Fraud in factum and fraud in inducement
distinguished.
There are two (2) kinds of fraud relating to
negotiable instruments, namely:
(1) Fraud in the execution or fraud in factum. - It
exists in those cases in which a person,
without negligence, has signed an instrument
which was, in fact, a negotiable instrument,
but was deceived as to the character of the
instrument and Without knowledge of it, as
where a note was signed by one under the belief
that he was signing as a witness to a
deed, or where the signature was procured by
fraudulent use of carbon paper.
This kind of fraud is a real defense (see Sec. 14.)
because there is no contract. It implies
that the person did not know what he was
signing; and
(2) Fraud in inducement or simple fraud. It is that
which relates to the quality, quantity,
value, or character of the consideration of the
instrument. (Ogden, op. cit., p. 326.)
It implies that the signer knew what he was
signing but that he was induced by fraud to sign.
(Babb & Martin, op. cit.,p. 231.)
A clear illustration of this fraud exists where 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.
Rights of holder not in due course.
A holder not in due course has the following
rights:
(1) He may sue on the instrument in his own
name (Sec.51.);
(2) He may receive payment and if the payment is
in due course, the instrument is
discharged (ibid.);
(3) He is entitled to the instrument but holds it
subject to the same defenses as if it were
non-negotiable (Sec. 58.); and
(4) He has all the rights of the holder in due
course from whom he derives his title in respect
of all parties prior to such holder, provided he is
not himself a party to any
fraud or illegality affecting the instrument. (ibid.)
Rights of purchaser from a holder
In due course.
Whether a holder takes a negotiable instrument
tree from defenses that might obtain
between the original parties depends upon the
further fact of his status as a holder in
due course or as a taker through such holder.
(1) Rights of a mere transferee. - If a person is
not a hold- er in due course, his rights are
those of a transferee of a non- negotiable
instrument so that he is not free from personal
defenses.
(2) Rights of transferee from a holder in due
course. Section 58 provides this exception: a
holder who derives his title from a holder in due
course can still enjoy the special rights of
the latter even though he himself is a mere
transferee. Such holder is called a holder
through a holder in due course.
(a) This rule has a logical basis. "If a third party
cannot take commercial paper from an
innocent holder free from equitable defenses
because such third party
knows of its original infirmities, then the rights of
the in- nocent holder are greatly reduced.
His market for such paper would be limited to
those who, like himself, had no notice of its
original infirmities. Since the innocent holder
could collect from the maker, it can make no
difference to the maker into whose hands the
note may pass." (Underwood v. Posha, 150
Pac. 571.)
(b) Note that there are two (2) requisites:
1) that he derives his title through a holder in due
course; and
2) that he was not himself a party to any fraud or
illegality affecting the instrument. But a
payee or indorse whose title is defective cannot
better it by
selling the instrument to a holder in due course
and buying it again.
EXAMPLES:
M is induced through (simple) fraud committed
by P to issue a promissory note in favor of P.
Here, P is a party to the fraud. P indorsed the
note to A. A has notice of the frand but
did not take part in it. By A, the note is indorsed
to B, a holderin due course. B, in turn,
indorses the note to C who knows how the note
was obtained but without being a party to
the fraud.
(1) In this case, even if C is not a holder in due
course,he has all the rights of such holder in
respect of M, P, and A, having derived his title
from B, a holder in due course, and the
defenses of fraud cannot be set up against him.
In effect, C is a holder in due course
relative to M, P, and A.
(2) If instead of indorsing the note to C, B
indorses it to P, payee, the latter cannot recover
on the instrument because he is party to the
fraud. P is remitted to his original position when
he first acquired the note from M.
(3) If the note is indorsed by C to D, who also has
notice of the defect but was not a party to
the fraud, D cannot recover from M because D
did not acquire his title from a holder in
due course.
(4) Assuming that C is a holder in due course and
A reacquires from him the note, the latter
is not given the former's rights although he was
not a party to the fraud. A is remitted to his
original position which he occupied when he first
acquired the note from P. The act of A in
negotiating the note to a holder in due course in
order to cut off M's defense upon his (A's)
reacquisition of the instrument may be
considered fraud under Section 55.
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
rule does not apply in favor of a party who
became
bound on the instrument prior to the acquisition
of
such defective title.
When holder presumed a holder
in due course.
The presumption expressed in this section to the
effect that every holder is deemed prima
facie to be a holder in due course arises only in
favor of a person who is a holder in
the sense defined in Section 191, that is, a payee
or indorsee who is in possession of the
instrument, or the bearer thereof.
(1) Proof of being a holder. Once the person
through
whose hands an instrument has passed shows
that he is a holder, the presumption accrues
in his favor. He does not have to prove that he
satisfies the requirements of a holder in due
course under Section 52.
(2) Burden of proof on holder where indorser's
title defective. - When it is shown that the
title of any person who has negotiated the
instrument was defective, as when the
instrument
is not payable to him or to bearer (De Ocampo
vs. Gatchalian, 3 SCRA 596.), then the

burden of proof shifts to the holder who must

show that he is a holder in

due course or that he acquired his title from a

holder in due course although he is not

himself a holder in due course. A person who

acquires title from a prior holder in due

course is referred to as holder through a holder

in due course.

(3) Exception. The law, however, establishes an

exception to the second mentioned rule,

i.e., the holder has no burden of proving that he

is a holder in due course in favor of a party

who became bound on the instrument prior to

the acquisition of such defective title. In other

words, in this case, we revert to the presumption

that the holder is a holder in due course.

EXAMPLES:

(1) P obtained the note of M through (simple)

fraud, and negotiates it to A, A to B, B to C,

and C to D, the present holder. The presumption

is that D is a holder in due course. But

once M proves the fraud committed by P, the

burden is shifted to D to prove that he is

actually a holder in due course or that C, from

whom he acquired title, is a holder in due

course.

(2) Suppose the fraud was committed by A

against P, the presumption that D is a holder in

due course is not destroyed because M became

bound on the instrument before the

acquisition of the defective title by A Note that P

is similarly situated as M in the first

example. As P became bound on the instrument

contemporaneous

(not prior to) with the acquisition of A's defective

title, the presumption of due course holding

does not accrue in favor of D as far as P is

concerned once P shows that the title of A

was defective. D against st is suppose one

shiniatottard with o omm-tediar

of M in the first example, and P, the same as that

of M in the second example.