eae NEGOTIABLE INSTRUMENTS LAW MADE EASY Ovo By: DEAN ANTONIO H. §BAD, JR. Dean, College of Law, Adamson University Former Dean, Institute of Law, Far Eastem University Bar Reviewer, Ateneo de Manila School of Law, Far Eastern University ‘Adamson University _ Bar Examiner in Labor Law, 1999 Lecturer, U.P. Law Center, Institute of Judicial Administration FIRST EDITION 2006 ANAMCON LINIVERGITV | IRRARV-MANII A : 1TAw KF SU5.5) Ne | Aaa Philippines Copyright, 2006 2004 Ct By By: Dean Antonio H. Abad, Jr. 78783 pn res na Supreme Court of the Philippines: ‘Panee SFaura, Hanila FROM THE CHAMBERS OF. Artemio. (HEF JUSTICE OF THE PHILIPPINES FOREWORD Once in a very rare while, one rediscovers “old” knowledge in an entirely different light. And from that one exhilarating experience comes a deeper sense of appre- ciation, understanding, and enlightenment. This book Negotiable Instrument Law Made Easy of- fers one such great experience. Written by Dean Antonio H. Abad, Jr., my former law partner, it recasts the Negotias ble Instruments Law (NIL) from the “dry subject” that it is often touted to be to a more comprehensible and, resul- tantly, mors exciting subject. Breathing, life into the various and sometimes difficult provisions of the NIL are the many interesting examples drawn by the author from common, and realfe situations. The author wades through the complexities of the law with the art and skill of a master, breaking down complex ideas into more understandable concepts. At the same time, he points out the interrelations of the different sections for a more integrated picture of the law. As a teacher of the NIL for the past 20 years, Dean ‘Abad lends to the exposition his vast experience concem- ing the subject, thereby giving it depth and color. His class iiiand bar review lectures have also formed the ‘foundations of this book. Hence, it uses tried and tested means, by which to “make the subject lively and interesting” and thus keep his readers awake. For this accomplishment, | commend Dean Abad. _ = ARTEMIO V. PANGANIBAN ‘Chief Justice of the Philippines PREFACE | had my first encounter with Negotiable Instruments Law as a teacher in 1976 when then Dean Neptali A. Gon- zales of the FEU Institute of Law assigned me to teach the subject. | had never taught the subject before and so | had to study Negotiable Instruments Law all over again. At times, | found myself just one or two chapters ahead of my students. The textbook we were using then was the one au- thored by Judge Federico C. Alikpala. Aside from this text- book, however, | read other references to augment my knowledge about the subject. | was deathly afraid that | may not be abie to answer my students’ questions or, worse, lecture in such a way as to parade my ignorance. My other references were Negotiable Instruments, Law by Agbayani; Cases and Materials in Negotiable In- struments Law by Campos Lopez-Campos; The Negetia- ble Instruments Law by Alvendia; and much later, Pandect of Commercial Law and Jurisprudence by. Vitug. My lecture then in class, and especially during the bar review, was a mix of the writings of the books | have read. So, also, in the writing of this book, | was influenced by them. For instance, in Chapter |, | did not follow the chronological order of the Jaw but, instead, the inter-relation of the sections with each other—aia Campos Lopez-Campos. Likewise, at the end of most chapters in the book, there is an enumeration of rele- vant cases—ala Alvendia. The book is replete with exam- ples to explain the law—ala Agbayani. In the course of my teaching the subject through the years at Far Eastem University, Ateneo de Manila School ‘of Law, Adamson University College of Law and other barreview centers, | invariably noticed that the students found the subject boring and difficult to understand. Conse- quently, | had to devise ways and means to make the sub- ject lively and interesting to keep my students awake and to revert their attention to the subject at hand. To make them understand the subject more fully, | had to simplify the law and go down to their level in a language that even a layman could comprehend. My examples were atrocious and my mnemonics naughty so that my students will never forget. My class was like a theater and my students were the actors in a play called the Negotiable Instruments Law. It was not until 1993 when this play found its way in some kind of a script as the Ateneo Central Bar Operations taperecorded my bar review on Negotiable Instruments Law. When I was given a transcription of my lecture in 1996, | was amazed to leam that my bar review lecture has been’ doing the rounds of bar reviewees of many law schools. It was then I decided to write this book, using said transcription as its foundation. But the writing of the book was long in coming. Almost ten years passed before | fi- nally buckled down to work to finish writing the subject | have found to love. | wish to acknowledge the tremendous time and effort expended by Ms. Theresa Castafieda-Cunanan in typing the manuscript of this book. In the same manner, | wish to express my gratitude to my lovely wife, Atty. Marina Da- lena-Abad, for helping me proofread the manuscript of this book; and Atty. Christan Rhee Delfin B. Orencia for helping me in some research. Likewise, | wish to thank the Ateneo Central Bar Operations of 1993 for giving me a copy of the transcription of my bar review lecture on Negotiable In- struments Law. Lastly, | wish to thank the Central Book Supply, inc. particularly, its President, Atty. Jose Agaton R. “Tony” Sibal, for publishing this book. ‘The author sincerely hope that this book will help law- yers and students of law alike to understand easily what heretofore was a difficult Negotiable Instruments Law. vilDEDICATION | dedicate this book to the memory of my parents ~ Prof. Antonio M. Abad of Cebu and Prof. Jesusa Aquino Henson of San Fernando, PampangaINTRODUCTION Act No, 2031, otherwise known as the Negotiable Instruments Law, has for its prototype the Uniform Negotiable Instruments Law of the United States and the English Bill of Exchange Act of 1882. It is a per- fect universal law that applies to all transactions in- volving negotiable instruments regardless of jurisdic tions. This is as it should be; otherwise, international commercial intercourse will be unduly hampered if different jurisdictions have different interpretations as to the form and application of negotiable iristruments. The Negotiable instrument Law (NIL) treats of only two (2) kinds of instruments, namely, Promissory Notes and Bills of Exchange. (A check is a special kind of a Bill of Exchange.) These instruments facilitate commercial deals among traders and merchants in domestic as well as in foreign business transactions. This is so because of their innate characteristics as to negotiability, utility and accu- mulation of secondary contracts, After the physical making of the instrument, it is the delivery thereof which gives it “life". No rights can arise in respect of any instrument under the Negotiable Instru- ments Law until it is delivered.’ An undelivered bill or note is inoperative. Until delivery, the contract is revocable. And the issuance as well as the delivery of the (instrument) must be toa person who take it as a holder.” * George A. Kauffman vs. The Philippine National Bank, 42 Phil 82, 106 (1921), ? People vs. Yabut, 76 SCRA 624 (1977 ) xiWhether the issued bill or note is negotiable or not would depend upon its compliance with the requisites of negotiability under Section 1 of the NIL. If the bill or note conforms with said requisites, it is negotiable; otherwise, it is not. A negotiable instrument is transferred from person to person by negotiation; whereas, a non-negotiable instru- ment is transferred from person to person by assignment, In negotiation, the transferee of the instrument can become a holder in due course arid, as such, can acquire rights superior to that of the transferor. Whereas, in as- signment, the transferee merely steps into the shoes of the transferor and, therefore, cannot acquire any better right than his immediate predecessor. Negotiable Instruments are used as substitutes for money. As the instrument is transferred from one person to another, secondary contracts are accumulated thereby. The instrument may be negotiated to another by delivery (for instruments payable to bearer) or by indorsement com- pleted by delivery (for instruments payable to order). The tiabilities of parties on the instrument are de- pendent upon their warranties either as maker, drawer, acceptor or indorser. The maker and the acceptor are pri- matily liable on the instrument; whereas, the drawer and the indorsers are only secondarily liable thereon. The instrument's “life” is ended when it is discharged by payment or by any of the modes of extinguishing an obligation. That, in a nutshell, is what this book is all about. xii TABLE OF CONTENTS, Page TITLE | CHAPTER | FORM AND INTERPRETATION SECTION 1. Form of negotiable instruments 1 4. Requisites of Negotiability 1 2. Itmust be in writing 2 3. It must be signed . . 3 4. Unconditional promise or order .. 3 z SECTION 3. When promise is unconditional .. 5. Sum certain in money 6 SECTION 2. What constitutes certainty astosum.. 6 5.2.1 With interest .. 6 5.2.2 Stated installments 7 5.2.3 Stated installments with accel- eration clause .. a 5.2.4 With exchange 7 5.2.5 Costs and attorney's fees ... 7 5.3 Payable in money : 8 SECTION 5. Additional provisions not affecting negotiabilty eso 8 5.3.2 Authorizes the sale of collateral securities 9 xiliTaBLE OF CONTENTS Confession of judgment ... Waiver of benefit Gives the holder an election to require some other act in lieu of money .. 6. Payable on Demand . SECTION 7. When payable on demand 6.1. Expressed to be payable on demand .. 10 6.2 No time for payment is expressed 6.3. Instrument is issued, accepted or dorsed when overdue 1 7. Payable at a fixed or determinable future time SECTION 4. Determinable future time; what consti- tutes 7.1 Ata fixed period after date 13, 7.2 Ata fixed period after sight .. 13 7.3. On or before a fixed or determinable future time 7.4 On or before the occusence of a specified event 8. Payable to order SECTION 8. When payable to order 2 15 SECTION 9. When payable to bearer 18 9.1 Expressed to be so payable ... 19 9.2 Payabie to a person or bearer 19 9.3 Payable to a fictitious person ..... 20 xiv 94 9.5 10. Drawee must be named with certainty SECTION 6. Omission; seal; particular money ‘TABLE OF CONTENTS Page Payee does not purport to be the same of any person .... at Only or last indorsement is a blank in- dorsement - at 23 23 SECTION 10. Terms, when sufficient 24 SECTION 11. Date, presumption as to 25 SECTION 12. Ante-dated and post-dated .. 25 SECTION 13. When date may be inserted 26 SECTION 14, Blanks; when may be filled .. a) SECTION 15. Incomplete instrument not delivered. 32 SECTION 16. Delivery; when effectual; when pre-e * sumed : 34 SECTION 17. Construction where instrument is ambiguous . 37 SECTION 16, Liability of pereon sigring in trade or assumed name 39 1. General Rule 39 2. Exceptions .. 40 SECTION 19. Signature by agent; author shown neg SECTION 20. Liabilty of person signing as agent, and so forth 40 SECTION 21. Signature by procuration; effect of... 41 SECTION 22. Effect of indorsement by infant or corporation 4TABLE OF CONTENTS SECTION 23. Forged signature; effect of . CASES: CHAPTER II CONSIDERATION SECTION 24. Presumption of consideration SECTION 25. Value, what constitutes SECTION 26. What constitutes holder for value . SECTION 27. When lien on instrument constitutes holder for value ... SECTION 28. Effect of want of consideration . 51 53 SECTION 29. ity of accommodation party CASES: 55 CHAPTER II NEGOTIATION SECTION 30. What constitutes negotiation oT SECTION 31. Indorsement; how made 57 SECTION 32. Indorsement must be of entire in- strument : 87 SECTION 33. Kinds of indorsement SECTION 34. Special indorsement; indorsement in blank ..... Seo 59 SECTION 35. Blank indersement; how changed to special indorsement .........0-- 59 TaBLe OF CONTENTS SECTION 36. When indorsement restrictive .... SECTION 37. Effect of restrictive indorsement; rights of indorsee ... SECTION 38. Qualified indorsement .. SECTION 39. Conditional indorsement 1. Kinds of indorsements .. 2. Special indorsement . 3. Blank indorsement 4. 5. Restrictive indorsement Qualified indorsement .. 6. Conditional indorsement .. 7 SECTION 40. Indorsement of instrument payable to bearer ... e 65, SECTION 41. Indorsement where payable to two ‘or more persons . . 68 SECTION 42. Effect of instrument drawn or in- dorsed to a person as cashier 7 67 SECTION 43. Indorsement where name is mis- spelled, and $0 forth... SECTION 44. Indorsement in representative ca- pacity .. : SECTION 45. Time of indorsement; presumption ... 68 SECTION 46. Place of indorsement; presumption .. 69 SECTION 47. Continuation of negotiable character. 69 SECTION 48. Striking out indorsement .. -- 70 SECTION 49. Transfer without indorsement; effect of a xviiTABLE OF CONTENTS Page SECTION 50. When prior party may negotiate instrument. 72 73 CHAPTER IV RIGHTS OF THE HOLDER SECTION 51. Right of holder to sue; payment ........ 74 SECTION 52. What constitutes a holder in due course 74 SECTION 53. When person not deemed holder in due course 7 7 SECTION 54. Notice before full amount paid SECTION 55. When title defective SECTION 56. What constitutes notice of defect SECTION 57. Rights of holder in due course SECTION 58. When subject to original defenses .... 83 SECTION 59. Who is deemed holder in due course 84 CASES: 7 86 CHAPTER V LIABILITIES OF PARTIES SECTION 60. Liability of maker SECTION 61. Liability of drawer ... 88 SECTION 62. Liability of acceptor SECTION 63. When a person deemed indorsers .... 92 xviii TABLE OF ConTENTS SECTION 64. Liability of irregular indorser SECTION 65. Warranty whore egotiation by de- livery and 0 forty ws. SECTION 66. Liability of general indorser .. SECTION 67. Liability of indorser whete paper negotiable by delivery ... SECTION 68. Order in which indorsers are liable SECTION 69. Liability of an agent or broker CASE: CHAPTER VI PRESENTMENT FOR PAYMENT SECTION, 70. Effect of want of demand on principal debtor SECTION 71. Presentment where instrument is not payable on demand and where payable on de- mand SECTION 72. What constitutes a sufficient pre- sentment SECTION 73. Place of presentment SECTION 74. SECTION 75. Presentment where instrument pay- able at bank Instrument must be exhibited SECTION 76. Presentment where principal debtor is dead SECTION 77. Presentment to persons liable as partners . xix Page 93 95 97 99 99 100 100 101 101 101 . 102 102 102 102 - 103TABLE OF CONTENTS Page SECTION 78. Presentment to joint debtors 103, SECTION 79. When presentment not required to charge the drawer ne 108 SECTION 80. When presentment not required to charge the indorser . 103 SECTION 81. When delay in making presentment is excused c e . 103 SECTION 82, When presentment for payment excused sone ese 103 SECTION 83. When instrument dishonored by non-payment ... - 104 SECTION 84. Liability of person secondarily liable, when instrument dishonored .. . 104, SECTION 85. Time of maturity . SECTION 86. Time: how computed .. - 104 SECTION 87. Rule where instrument payable at bank .. c . 105 SECTION 88. What constitutes payment in due course a 105 CASE: . 106 CHAPTER VII NOTICE OF DISHONOR SECTION 89. To whom notice of dishonor must be given ..... 7 . 108 SECTION 90. By whom given 109 SECTION 91. Notice given be agent 109 xx TABLE OF CONTENTS Page SECTION 92. Effect of notice on behalf of holder ... 110 SECTION 93. Effect where notice is given by party entitled thereto 110 SECTION 94. When agent may give notice . 112 SECTION 95. When notice sufficient 113 SECTION 96. Form of notice .. 113 113 114 SECTION 97. To whom notice may be given SECTION 98. Notice where party is dead .. SECTION 99. Notice to partners 4 SECTION 100. Notice to persons jointly liable 114 SECTION 101. Notice to bankrupt eeceneee 114 SECTION 102. Time within which notice must be, given 18 SECTION 103. Where parties reside in same place 115 SECTION 104. Where parties reside .in different places SECTION 105. When sender deemed to have given due notice 17 SECTION 106. Deposit in post-office; what consti- tutes .. 117 SECTION 107. Notice to subsequent party; time of 118 SECTION 108. Where notice must be sent 118 SECTION 109. Waiver of notice ... 119 SECTION 110. Whom affected by waiver .. 120 SECTION 111. Waiver of protest ... 120 116TaBLe OF CONTENTS Page SECTION 112. When notice is dispensed with 424 SECTION 113. cused .. 121 SECTION 114. drawer 121 SECTION 115. When notice need not given to indorser . 123 SECTION 116. Notice on non, payment where acceptance refused . SECTION 117. Effect of omission to give notice of Non-acceptance .. SECTION 118. When protest need not be made; when must be made CASES: 124 125 126 . 126 CHAPTER VII DISCHARGE OF NEGOTIABLE INSTRUMENTS SECTION 119. Instrument; how discharged .... 128 SECTION 120. When persons secondarily liable ‘on the instrument are discharged . SECTION 121. Right of party who discharges in- strument ao . 131 SECTION 122. Renunciation by holder 133 SECTION 123. Cancellatio of proof .. 134 SECTION 124, Alteration of instrument; effect of .... 134 SECTION 125. What constitutes a material altera- tion . 135 129 unintentional; burden TABLE OF CONTENTS Page CHAPTER IX BILLS OF EXCHANGE FORM AND INTERPRETATION SECTION 126. Bill of exchange defined 137 SECTION 127. Bill not an assignment of funds in hands of drawee ... 140 SECTION 128. Bill addressed to more than one drawee 144 SECTION 129. Inland and foreign bills of exchange 141 SECTION 130. When bill may be treated as prom- issory note : SECTION 131. Referee in case of need CASE: SECTION 132. Acceptance; how made, and so 142 143 144" forth : . 145 SECTION 133. Holder entitled to acceptance on face of bill .. 146 SECTION 134. Acceptance by separate instrument 146 SECTION 135. Promise to accept; when equiva- lent to acceptance .. 147 SECTION 136. Time allowed drawee to accept ...... 148 SECTION 137. Liability of drawee retaining or de- stroying bill .. 148, SECTION 138. Acceptance of incomplete bill ....... 149 SECTION 139. Kinds of acceptance ... 150 xxiiTABLE OF CONTENTS Page SECTION 140. What constitutes a general accep- tance .. 150 SECTION 141. Qualified acceptance 150 SECTION 142. Rights of parties as to qualiied acceptance . 151 CHAPTER XI PRESENTMENT FOR ACCEPTANCE SECTION 143. When presentment for soneptance must be made .. SECTION 144. When failure to Present releases drawer and indorser . SECTION 145. Presentment; how made SECTION 146. On what days presentment may be made .. 153 155 SECTION 147. Presentment where time is cient =o 157 SECTION 148. Where presentment is excused 158 SECTION 149, When dishonored by —_non- acceptance 159 SECTION 150. Duty of holder where bill not ac- cepted 159 SECTION 151. Rights of holder where bill not ac- cepted : 159 CHAPTER XII PROTEST SECTION 152. In what cases protest necessary .... 161 xxiv TABLE OF CONTENTS Page SECTION 153. Protest; how made 162 SECTION 184. Protest, by whom made .. 1. Example of a Notice of Protest .. 2. Example of a Certificate of Protest .. SECTION 155. Protest; when to be made .. SECTION 156. Protest; where made SECTION 157. Protest both for non-acceptance and non-payment ... -. 166 SECTION 158. Protest before maturity where ac- ceptor insolvent . SECTION 159, When protest dispensed SECTION 160, Protest where bill is lost and so forth 163 165 165 167 167 16 CHAPTER XIII ACCEPTANCE FOR HONOR SECTION 161. When bill may be accepted for honor .. 169 SECTION 162, Acceptance for honor; how made ... 170 SECTION 163, When deemed to be an accep- tance for honor of the drawer ...... . 170 SECTION 164. Liability of the acceptor for honor .... 174 SECTION 165. Agreement of acceptor for honor .... 171 SECTION 166. Maturity of bill payable after sight accepted for honor 172 SECTION 167. Protest of bill accepted for honor, and so forth .. 173TABLE OF CONTENTS Page SECTION 168, Presentment for Payment to accep: tor for honor, how made .. SECTION 169. when delay in making presentment is excused . 173 173 CHAPTER XIV PAYMENT FOR HONOR SECTION 171, Who may make payment for honor : 175 SECTION 172. Payment for honor; how made ... 175 SECTION 173. Declaration before payment for honor SECTION 174, Preference of parties offering to pay for honor SECTION 175. Effect on subsequent parties where bill is paid for honor........ SECTION 176. Where holder refuses to receive payment supra protest ... SECTION 177. Rights of payer for honor .. CHAPTER XV BILLS INSET 175 176 177 177 178 SECTION 178. Bills in set constitute one bill SECTION 179. Right of holders where different parts are negotiated vee 184 SECTION 180. Liability of holder who indorses two or more parts of a set to different persons .. 181 SECTION 181. “Acceptance ot bills drawn in sets .... 181 179 ‘Tasve oF ConTeNTs Page SECTION 182. Payment by acceptor of bills drawn in sets . : 181 SECTION 183. Effect of discharging one of a set ... 181 CHAPTER XVI PROMISSORY NOTES AND CHECKS. SECTION 184. Promissory note, defined SECTION 185, Check defined 1. Distinctions between a check and a bill of exchange . 183 184 185 2. Some type of checks erences 185 SECTION 186. Within what time a check must be presented . 187 SECTION 187. Certification of check; effect of ..... 189 SECTION 188, Effect where the holder of check procures it to be certified e 189 SECTION 189. When check operates as an as- signment CASES: 189 190 CHAPTER XVII GENERAL PROVISIONS SECTION 190. Shorttitle . 192 SECTION 191. Definitions and meaning of terms ... 192 SECTION 192. Persons primarily liable on instru- ment .. oe 193 SECTION 193. Reasonable time, what constitutes . 193TABLE OF CONTENTS Page SECTION 194. Time, how computed; when last day falls on holiday 193 SECTION 195. Application of Act..... 193 SECTION 196. Cases not provided for in Act... 193 —+ot0— xxviii NEGOTIABLE INSTRUMENTS LAW MADE EASY TITLE | CHAPTER | FORM AND INTERPRETATION SECTION 1. Form of negotiable instruments.— ‘An instrument to be negotiable must conform to the, following requirements: (a) It must be in wri or drawer; (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 tims (qd) Must be payable to order or to bearer; and (e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. 1g and ned by the maker 1. Requisites of Negotiability 1.2. For a promissory note: The first four (4) requi- sites enumerated in, Section 1 above are the only ones2 Negoriste INSTRUMENTS Law MaDe Easy necessary to make the instrument negotiable, thus: (@) It must be in writing and signed by the taker; (b) It must contain an unconditional promise to pay a sum certain in money; (©) It must be payable on demand or determin- able future time; and (d)_ It must be payable to order or to bearer. 1.3. For a bill of exchange: All five (5) requisites enumerated in Section 1 must be present to make the instrument negotiable, thus: (a) It must be in writing and signed by the drawer; (b) It must contain an unconditional order to Pay a sum certain in money; (c) It must be payable on demand or determin- able future time; (d)_ It must be payable to order or to bearer; and () The drawee must be named or otherwise Indicated therein with reasonable certainty. 2. It must be in wri 2.1. The requirement that it must be in writing is ob- vious. Since an instrument is a document, there must be something in written form that can be transferred from person to person. If there is nothing in writing, there is nothing that can be transferred. 2.2. Any form will suffice. It may be printed or in long hand. 1t may be in ink or in pencil. It may be on paper or on parchment. It does not matter so long as itis in writing. The law did not distinguish. Form aNo INTERPRETATION 3 It must be signed. 3.1 If the instrument is a promissory note, it must be signed by the maker. 3.2 If the instrument is a bill of exchange, it must be signed by the drawer. 3.3 The signature does not necessarily have to be the full name of the maker or the drawer. Any mark or sign whatsoever, any scribbling, or anything that is placed on the instrument like a thumbmark, will suffice so long as it is intended to be the signature of the party to the instrument. 4. Unconditional promise or order. 4.1. “Unconditional” meaning that the promise or or- der to pay, must not be dependent upon a contingent event that is not certain to happen. It must be absolute,, i.e., an absolute promise to pay or an absolute order to pay. If the payment of the instrument is dependent upon an event that is not certain to happen, the promise or order to pay is not unconditional and, therefore, the instrument is not negotiable. 4.2 Example: | promise to pay X or order the sum of 1,000.00 if M will marry W. (Sad.) In the above example, the promise to pay is not un- conditional because there is no certainty that M will marry W. Hence, the instrument is not negotiable. 4.2.1. Suppose M married W, will the promis- sory note now become negotiable? No, the happening of the event will not cure the defect.’ * Please see Section 4, NIL.4 NEGOTIABLE InsTRUMENTS Law Made Easy 4.3. However, if the promise or order to pay is de- pendent upon an event that is certain to happen, the same will not render the instrument non-negotiable. 4.3.1 Example: | promise to pay X or order the sum of 1,000.00 upon the death of Pedro. (Sod.) Y In the above example, the condition given for pay- ment (the death of Pedro) is certain to happen. Hence, the condition did not destroy the negotiability of the instrument. 4.4. The unconditional promise or order to pay must be correlated with Section 3 which provides as follows: SECTION 3. When promise is unconditional. ‘An unqualified order or promise to pay is uncondi- tional within the meaning of this Act though coupled with— (a) An indication of a particular fund out of which reimbursement is to be made or a particular account to be debited with the amount; or (b) A statement of the transaction which gives rise to the instrument. But an order or promise to pay out of a particular fund is not unconditional. The instrument will remain negotiable even if there is an indication of a particular fund out of which reimburse- ment is to be made after payment is made. The same thing is true even if a particular account is indicated to be deb- ited with the amount after the instrument is paid. Foau ano INTERPRETATION 5 4.4.1 Example: Pay to X or order the sum of P1,000.00. Reimburse yourself from the proceeds of my farm. (Sod) Y To:Z The above example presupposes a prior arrangement between the drawer and the drawee with respect to the payment of the instrument. Even if there is no money in his hands but the drawee accepts, then he must pay out of his own pocket and reimburse himseff later. In other words, Z first pays X; then after paying X, Z reimburses himself from the proceeds of Y's farm. Thus, the order to pay in this case is still unconditional. Hence, the instrument remains to be negotiable. However, if the particular fund indicated is not in- tended for reimbursement but one out of which payment is to be made, the promise or order to pay becomes condi- tional. This is so because the assumption is that the par- ‘ioular fund indicated where payment is to be taken is suffi- cient to pay the amount of the note or the bill. In this case, the payment is conditioned upon the sufficiency of the fund. Hence, the instrument becomes non-negotiable, 4.4.2. Statement of the transaction An instrument is usually issued due to a transaction. The mere statement of the transaction that gives rise to the instrument will not destroy the negotiability of the instru- ment. However, if the instrument is made subject to the terms and conditions of the transaction, the instrument becomes non-negotiable. This is so because the negotia- bility of an instrument is to be determined only by just look- ing at the face of the instrument itself and not anywhere else. Hence, if the instrument is burdened with the terms6 Necoriaate Instruments Law Mane Easy and condi where to determin: be. 5. Sum certain in money ns of the transaction, one has to look else- negotiability. This is not as it should The principal amount to be paid must be certain; and it must be payable in terms of money only as a general rule. 5.1 A sum is certain if the amount to be paid as stated on the face of the instrument is a fixed sum of money. 5.2 However, there are certain stipulations which when included in the instrument itself will not destroy the certainty of the amount to be paid. Thus, Section 2 pro- vides as follows: SECTION 2. What constitutes certainty as to sum.—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, with a provision that, upon default in payment of any installment or of inter- est, the whole shall become due; or (c) With exchange, whether at a fixed rate or at the current rate; or (a) With costs of collection or an attorney's fee, in case payment shall not be made at maturity. 5.2.1 With interest Even if payment of interest is stipulated, it will not make the sum uncertain because by a simple mathemati- cal computation the sum payable can be easily ascer- tained. Form AND INTERPRETATION 7 5.2.2 Stated installments An instrument payable by stated installments, to re- main negotiable, must contain the following: (a) each in- stallment must be stated on the instrument, and (b) the maturity of each instaliment must be fixed; otherwise, the instrument becomes non-negotiable for non-compliance with the requisite that the instrument must be payable on demand or at a fixed or determinable future time. 5.2.3 Stated installment with acceleration clause An acceleration clause is a statement in an instrument whereby it is agreed that in the event of failure to pay a stated installment, the entire sum payable becomes due and demandable immediately. In other words, the accel- eration clause hastens the maturity of the entire instru- ment. This stipulation will not render the instrument non~ negotiable. 5.2.4 With exchange This contemplates of a situation where the instrument is drawn in one country and made payable in another. The fact that the sum payable is in a foreign currency will not atfect the negotiability of the instrument because the rate of exchange among the different currencies can be easily determined. The certainty of the principal sum payable can be arrived at by a simple mathematical computation, 5.2.5 Costs and attorney's fees The stipulation with respect to the payment of attor- ney's fees or costs of litigation will come into play only after the maturity of the instrument when the amount due re- mains unpaid. Therefore, at that time, the instrument is already overdue. So that, from the date of the issue of the instrument up to the date of its maturity, the sum is certain. The sum becomes uncertain only when the instrument is already overdue; when the instrument is no longer nego-8 Negoriasie INSTRUMENTS Law MADE Easy tiable In its full commercial sense. That is why this stipula- tion will not impair the negotiability of the instrument. 5.3 Payable in money The sum payable in an instrument must be made payable only in money. It cannot be made payable in goods, services or property. This is so because in business money is the standard of value. 5.3.1 In some instances, the doing of an act in addition to the payment of money will not destroy the negotiable character of the instrument. Thus, Section 5 provides as follows: SECTION 5. Additional provisions not affecting negotiabitity.—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 oF protection of the obligor; or (a) Gives the holder an election to require some- thing to be done in lieu of payment of money. But nothing in this section shall validate any pro- vision or stipulation otherwise iltegal. Note that the law itself provides that an instrument which contains an’ order or promise to do any act in addi- tion to the payment of money is not negotiable. That is the general rule. The exceptions are the following: Form avo INTERPRETATION 9 5.3.2. Authorizes the sale of collateral secu- tities The act to be done in addition to the payment of money is to sell the collateral securities. But this act of selling will happen only if the instrument is not paid at ma- turity. Hence, at the time the collateral securities are to be sold, the instrument is already overdue. Clearly, therefore, from the issue of the instrument up to the time of its matur- ity, there is no additional act to be done other than the payment of money. The additional act will arise only after the instrument is overdue when the instrument is no longer negotiable in its full commercial sense. 5.3.3 Confession of judgment This is void as against public policy as it denies a per- son of his day in court.” 7 5.3.4 Waiver of benefit The waiver of any benefit granted by law, e.g. waiver of notice of dishonor,* will not affect the negotiability of the instrument. 5.3.5 Gives the holder an election to require some other act in lieu of money If the instrument is payable in money or something else (e.g. giving of property), but the option is given to the holder, the instrument remains negotiable. This is so be- cause the holder can still insist that the payment be made in money. However, if the instrument is payable in money and giving of property of rendition of services, the instru- ment becomes non-negotiable. In this case, the holder has ? PNB vs: Manila Oil Refining & By-Products Co., 43 Phil. 444 (1922), * please see See. 108, NIL| en 10 NeGoriasLe Instauments Law Mane Easy no choice as the instrument is not payable in money only but inclusive already of property or services. Hence, the instrument is non-negotiable. 6. Payable on demand SECTION 7. When payable on demand.—An in- strument is payable on demand— (a) When so it is expressed to be payable on demand, of at sight, or on presentation; or (b)_ In which no time for payment is expressed. Where an instrument is issued, accepted, or in- dorsed when overdue, it is, as regards the person so issuing, accepting, or indorsing it, payable on demand. An instrument payable on demand is due and de- mandable immediately from its issue. 6.1 Expressed to be payable on demand. Example: | promise to pay A or order the sum of P1,000.00 on demand. (Sgd.) B Instead of the words “on demand’, the words “at sight" or “on presentation” may be used. Thus, the instru- ment is payable at sight or payable on presentation, as the case may be. 6.2 No time for payment is expressed. Font AND INTERPRETATION " Example: | promise to pay A or order the sum. 1,000.00 (Sod) B This is payable on demand because the note does not express a time for payment. 62.1 Suppose the note read as follows: | promise to pay A or order the sum of P1,000.00 on (Date) (So4)B | ° The date of payment is left blank. Some authorities consider this as still payable on demand. It appears, how- ever, that this is a case of an incomplete instrument and may be governed by the provisions of Sections 14, 15 or 16 of the Negotiable Instruments Law, depending on whether or not the instrument has been delivered. 6.3 Instrument is issued, accepted or indorsed when overdue. Example: A executed bill of exchange in favor of B or order for 1,000.00 payable on January 15, 2006, addressed to C as drawee. However, A delivered the bill to B only on January 30, 2006, when the instrument was already over- due. In this case, as regards A who issued the bill, the instrument is payable on demand.12 Negoriaate Instruments Law Mane Easy 6.3.1. Suppose in the example above, B negoti- ated the bill to C; as regards B who indorsed the bill, the instrument is payable on demand. 6.3.2 Suppose, also, in the example above, D (holder) presented the bill for acceptance to C, and C accepted; as regards C who accepted the bill, the in- strument is payable on demand. 7. Payable at a fixed or determinable future time. SECTION 4. Determinable future time; what constitutes.—An instrument is payable at a determin- able future time, within the meaning of this Act, which is expressed to be payable— (a) Ata fixed period after date or sight; or (b) On or before a fixed or determinable future time specified therein; or (©)_ On or ata fixed period after the occurrence of a specified event which is certain to happen, though the time of happening be uncertain. An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect. The instrument may be made payable on a fixed date or at some other future time provided the maturity of the instrument can be absoiutely determined with certainty. ‘Suppose the instrument is payable on April 30, is it negotiable? No, because there is no year indicated and, therefore, it is not payable on a fixed date. (n fact, in this, case, one cannot determine as to when the instrument becomes payable. Fon ano INTERPRETATION 13 7.1. Ata fixed period after date. Example: November 15, 2006 | promise to pay A or order the sum of 1,000.00 thirty (30) days after date. (Sad) B The note is dated November 15, 2006. It will mature thirty (30) days from November 15, 2006. Hence, the note is payable at a determinable future time, by a simple mathematical computation, on December 15, 2006. 7.2 Ata fixed period after sight. This usually applies to a bill of exchange. “After sight” simply means after the drawee, to whom the bill is ad- dressed, shall have seen the bill when it is presented to him by the holder for acceptance. Example: November 15, 2006| Pay to A or order the sum of P1,000.00 thirty (30) days after sight. (Sad) B To: C A, the payee (holder), presents the instrument for ac- ceptance to C, drawee, on December 1, 2008. This is the ime C shall have seen the instrument and the thirty (30) days will begin to run only on December 1, 2006. Hence,14 NegoTiAaLe INSTRUMENTS Law MADE Easy Fort AND INTERPRETATION 15 thirty (80) days after the death of Pedro or earlier. Simi- the bill is payable at a determinable future time by a simple of P larly, this will not affect the negotiability of the instrument. mathemathical computation, on December 31, 2006. 7.3. On or before a fixed or determinable future 7.4.1. Inthe example given above, suppose the time instrument is payable thirty (30) days before the death ‘of Pedro, is the promissory note negotiable? No, the Example: note is not negotiable because the time for payment is not certain, Upon the death of Pedro, the instrument is already overdue. | promise to pay A or order the sum of ' 1,000.00 on or before November 15, 2006. (Sad) B 8. Payable to order SECTION 8. When payable to order.—The in- strument is payable to order where it is drawn payable to the order of a specified person or to him or his or- der. It may be drawn payable to the order of — (a) A payee who is not maker, drawer, or, ‘The instrument will mature and will become payable on November 15, 2006; although B, the maker (the person primarily liable); has the option to pay the note earlier. This will not impair the negotiability of the instrument. drawee; or 7.4 On or before the occurrence of a specified (b) The drawer or maker; or event (c) The drawee; or Example: (4) Two or more payees jointly; or (e) One or some of several payees; or () The holder of an office for the time being. Where the instrument is payable to order, the death of Pedro. payee must be named or otherwise indicated therein (Sod) B with reasonable certainty. RESETS: | promise to pay A or order the sum of 1,000.00 on or before thirty (30) days after the 8.1 One of the requisites of negotiability is that the The instrument will become payable thirty (30) days instrument must be “payable to order’ or “payable to after the death of Pedro, a determinable future time be- cause Pedro will surely die someday. As far as A (the payee/holder) is concerned, he can demand payment of the instrument only after thirty (30) days from the death of Pedro. As far as B (the maker who is primarily liable) is concerned; he has the option to either pay the instrument bearer’. These are the words of negotiabilty. If the instru- ment is not payable to “order” or “bearer” the instrument is not negotiable. = ane16 NEGOTIABLE INSTRUMENTS Law MaDe Easy Example: 1 promise to pay A the sum of P1,000.00 (S90) B In this example, the instrument does not contain the words of negotiabilty. The instrument is non-negotiable because itis not payable to order or to bearer; itis payable toa specified person. 8.2. An instrument payable to order is negotiated by endorsement completed by delivery. Hence, there must always be a payee; otherwise, there will be nobody who will indorse the instrument. This is the reason why the payee must be named or otherwise indicated with reason- able certainty. 8.3. Ordinarily, in an instrument payable to order, the payee is some person other than the maker, drawer or drawee in the instrument. 8.3.1 In a promissory note, it is unusual for a maker to make himself the payee of the instrument. Where the maker is the payee, he is in effect making himself liable to himself on the instrument. Thus, as it is, the instrument produces no legal effect. This note, maker as payee, will produce legal effects only once the payee-maker indorses the instrument to another person because such indorsement will then give rise to rights and obligations of the parties under the in- strument. 8.3.2 Ina bill of exchange where the drawer is the payee of the instrument, in effect the drawer is asking the drawee to pay him (drawer). 8.3.3 Ina bill of exchange where the drawee is the payee, in effect the drawar is asking the drawee to pay himself (drawee). Fort aNo INTERPRETATION 17 8.4 Two or more payees jointly Example: | promise to pay to the order A and B the sum of P1,000.00. (Soa) In case of indorsement, both A and B must indorse the instrument to pass title, unless one has authority from the other. 8.5 One or some of several payees Example: | promise to pay to the order of A, B or C the sum of P1,000.00 - (Sad) D The indorsement of any of them (A or B or C) will suf- fice to pass title. 8.6 Holder of an office for the time being Example: | promise to pay to the order of the Com- missioner of the Bureau of Customs the sum of P1,000.00 (Sad) A ‘Thus, whoever is the incumbent Commissioner of the Bureau of Customs at any given time is the payee of the instrument.18 Neaoriaace InstaUMeNTs Law MaDe Easy 9. Payable to bearer. SECTION 9. When payable to bearer—The in- strument 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 (©) 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 (a) When the name of the payee does not pur- port to be the name of any person; or (e) When the only or last Indorsement Is an en- dorsement in blank. An instrument payable to bearer is negotiated by mere delivery. There is no need to indorse the instrument. Whoever is in possession of the instrument is the bearer thereof; hence, he is the holder of the instrument and the same is payable to him. The bearer (holder) can negotiate the instrument to another by merely delivering the posses- sion of the instrument to the latter. The warranties of a person who negotiates by delivery extends only to his im- mediate transferee. Example: In an instrument payable to bearer, A negotiated by mere delivery to B; B to C; C to D; D to E, holder, all by delivery also. In this illustration, E (holder) can only go against D. E cannot go against C because the warranties of C extends only to his immediate transferee D; the warranties of C do not extend up to E. Font AND INTERPRETATION 19 9.1 Expressed to be so payable Pay to bearer the sum of P1,000.00 (Sad) X To: ¥ This bill of exchange is payable to bearer because it is expressly stated to be payable to bearer. 9.2 Payable to a person or bearer Pay to Maria Sta. Maria or bearer the sum of P1,000.00 (Sad) X To: ¥ . The instrument is payable to bearer because it is payable to a person named therein (Maria Sta. Maria) or to whoever is in possession or holder of the bill, the bearer thereof. 9.2.1 However, in the example given, if the word “bearer” precedes the name of the person speci- fied in the bill, the instrurnent becomes non- negotiable. Pay to bearer Maria Sta. Maria the sum of P1,000.00 (Sgd) X To: The bill in this case is no longer negotiable because the instrument is not payable to bearer but already payable to a specified person.| 2 a 7 20 NegoriasLe Instruvents Law Mabe Easy 9.3 Payable to a fictitious person The determinative factor is that the maker or drawer making or drawing the instrument knew that the payee placed thereon is a fictitious person. Example: | promise to pay Juan dela Cruz the sum of P1,000.00 (Sgq) Pedro San Pedro Is this note payable to order of to bearer? The answer is: it depends on the intention of the maker. If the maker intended that the instrument be paid to Juan dela Cruz, the symbol of the Filipino race, a fictitious person, the note is payable to bearer. Although the words of negotiability (payable to “order” or “bearer’) are not written on the in- strument, the note in this case is negotiable. But if the maker intended the note to be made payable to the real person named Juan dela Cruz who is president of the Fo- tary Club of Diliman, the instrument is not payable to bearer because it is not payable to a fictitious person. It is not even payable to order because the instrument is pay- able to a specified person, In this case, the note is non- negotiable, However, if it can easily be deduced that the payee named in the instrument is clearly fictitious, the instrument is payable to bearer. Example: | promise to pay Batman the sum of 1,000.00 (Sad) Pedro San Pedro FoRM AND INTERPRETATION at To say in this case that the negotiability of the in- strument is dependent upon the intention of the maker is to be ludicrous. 9.4 Payee does not purport to be the same of any person Example: Pay to CASH the sum of P1,000.00 (Sgd) X To: ¥ This bill of exchange is payable to bearer because “CASH does not appear to be the name of any person. 9.5 Only or last indorsement is a blank indorse- ment Indorsements are usually made at the back of the in- strument. If the holder of the instrument, be he the payee, oF the indorsee, just signs his name without indicating to whom the instrument is transferred, that is a blank in- dorsement. If the instrument is originally payable to order, the blank indorsement converts the instrument to one pay- able to bearer. In other words, the order instrument be- ‘comes a bearer instrument by virtue of the blank indorse- ment. Example: | promise to pay to the order of B the sum of P1,000.00 (Sgd) AScenario 22 NegoTiBLe InstruMENTS Law Mabe Easy This is a promissory note payable to order. The payee-holder of the note then indorses the same at the back of the instrument as follows: (Sad) B This is a blank indorsement because B just signed his name without naming the person to whom he is indorsing the note. Under this rule, the note payable to order be- ‘comes a note payable to bearer and can, henceforth, be negotiated by mere delivery. 9.5.1. Suppose after the blank indorsement made by B, the latter gave the note to C. In this case, C can now negotiate the same note to D by mere de- livery. However, let us suppose that C instead of ne- gotiating the note by mere delivery, negotiated the Note to D by special indorsement completed by deliv- ery, as follows: Pay toD (Sad) C In this case, the note which was payable to bearer because of the blank indorsement, once again becomes a note payable to order because of the special indorsement. 9.5.2 After the note is indorsed to D in the manner shown in the above example, suppose D now Negotiated the instrument thru a blank indorsement to E, the note once more becomes an instrument pay- able to bearer. This is so because the last indorse- ment is an indorsement in blank. 9.5.3 In cases of this nature, what is important to consider is the last indorsement. If the last it dorsement is a special indorsement, the instrument is Fort aNo INTERPRETATION 23 payable to order. But if the last indorsement is a blank indorsement, the instrument is payable to bearer. 18. Drawee must be named with certainty. This requisite has reference only to a bill of exchange. ‘The drawee Is the person to whom the bill is addressed for acceptance. If upon presentment for acceptance, the drawee accepts, the latter is now known as the acceptor who becomes primarily liable on the instrument. If the drawee refuses to accept the instrument, the said instru- ment is deemed dishonored; and proceedings on dishonor must be undertaken; otherwise, parties secondarily liable on the instrument will be discharged from liabiity. SECTION 6. Omission; seal; particular money— The validity and negotiable character of an instrument, are not affected by the fact that— (a) Itis not dated; or (b) Does not specify the value given, or that any value had been given therefore; or (c)_Does not specify the place where it is drawn or the place where it is payable; or (d)_ Bears a seal; or () Designates a particular kind of current money in which payment is to be made. But nothing in this section shall alter or repeal any statute requiring in certain cases the nature of the consideration to be stated in the instrument.24 NecoriasLe InstruweNTs Law Mave Easy 1.. Anegotiable promissory note reads as follows: $100.00 Manila, Philippines April 23, 2006 For value received, | promise to pay to the ‘order of Juan San Juan the sum of $100.00 at RCBC Bank, Ayala Branch, Makati City. (Sgd) Pablo San Pablo a) Even if the date “April 23, 2006” is not written ‘on the instrument, the note will remain nego- tiable. b) Even if the words “For value received” is not found on the instrument, the note would still be negotiable. This is so because considera- tion is presumed. ©) So, also, even if he phrase “at RCBC Bank, Ayala Branch, Makati City’, the place where the note is payable, is not written thereon, the instrument is not rendered non- Negotiable thereby. d) Even if the instrument bears a seal, the note is stil negotiable as the seal is a mere for- malty. ©) Even if payment is designated to be paid in dollars (i.¢., $100.00), that fact alone will not affect the negotiability of the instrument. The instrument will be paid in legal tender. 2. However, a law may require a certain value to be given by way of consideration for the instrument, There appears to be no law in our jurisdiction in this regard. SECTION 10. Terms, when sufficient—The in- strument need not follow the language of this Act, but Fon AND INTERPRETATION 25 any terms are sufficient which clearly indicate an in- tention to conform to the requirements hereof. 1. The exact words of the law need not be used so long as the words used clearly indicate an intention to adhere to the requirements of the faw. Hence, instead of promise to pay”, the words “I agree to pay” may be used. Instead of “Pay to bearer”, the words “Pay to the holder” may be used. So long as the requisites of negotiability are present, the instrument will remain negotiable. SECTION 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. This provision contemplates of three situations,” : (a) The instrument is dated. Such date is deemed to be the true date of the making (in the case of a promissory note) or drawing in the case of a bill of exchange) of the b) The acceptance of the bill of exchange by the drawee is dated. Such date is deemed to be the true date of acceptance of the instrument; and (c) The in- dorsement of the instrument is dated. Such date is deemed to be the true date of the indorsement of the instrument. 2. Since they are merely prima facie evidence of the true dates of the making, drawing, acceptance or indorse- ment of the instrument, such dates may be overturned by convincing evidence to the contrary. SECTION 12. Ante-dated and post-dated—The instrument is not invalid for the reason only that ante-dated or post-dated, provided this is not done for an illegal or fraudulent purpose. The person to whom an instrument so dated is delivered acquires the title thereto as of the date of delivery.| | i. fh ih i 4 26 Necorias.e Instaunents Law MADE Easy 1. Ante-dating occurs when a date earlier than the date of issuance is place on the instrument. On the other ‘hand, post-dating occurs when a date later than the date of issuance is placed on the instrument. 2. Post dating or ante-dating an instrument will not affect its validity provided it is not done for an illegal or fraudulent purpose, Hence, ante-dating an instrument for the purpose of evading the provisions of a Usury Law will invalidate the instrument because it is done for a fraudu- lent purpose. 3. When an ante-dated or post-dated instrument is delivered to a person, the latter acquires the title to the instrument as of the date of its delivery, regardless of the date appearing on the instrument. SECTION 13. When date may be inserted— Where an instrument expressed to be payable at a fixed period after date is issued undated, or where the acceptance of an instrument payable at a fixed period after sight is undated, any holder may insert therein the true date of issue or acceptance, and the instru- ment shall be payable accordingly. The insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due course; but as to him, the date so inserted is to be regarded as the true date. The date is not important for purposes of the ne- gotiabilty of the instrument. 2. But the date of issue of the instrument may be- come material for purposes of determining whether or not the holder acted with reasonable diligence. In a promissory note, the instrument must be presented for payment within a feasonable time after its issue. In a bill of exchange, the instrument must bé presented for payment within a rea- ‘sonable time after its last negotiation. Otherwise, in both instances, persons secondarily liable on the instrument will be discharged from liability. However, at times the date FonM AND INTERPRETATION 27 becomes important for purposes of determining the matur- ity of the instrument. This is especially true in instruments payable at a fixed period after date and issued undated, or in instruments payable at a fixed period after sight and accepted undated. In both instances, the maturity of the instrument cannot be determined without knowing the true date of issue or acceptance of the instrument concemed, 3. When an instrument payable at a fixed period af- ter date is issued undated, the holder of such instrument is authorized by law to place the true date of issue of the said instrument to fix its maturity. 3.1 Example: (no date) | promise to pay Maria or order the sum of | * 1,000.00 thirty (30) days after date. (Sgd) Jose This is a promissory note payable thirty (30) days af- ter date but the instrument is issued undated. If the date of the delivery of the instrument to Jose is September 1, 2006, Jose must insert the date “September 1, 2006” on the instrument which is the true date of the issuance of the promissory note; and the instrument will be paid accord- ingly on the date of its maturity on October 1, 2006. 4. When an instrument payable at a fixed period af- ter sight is accepted without date, the: holder of such i strument is authorized by law to insert the true date of acceptance of said instrument to fix its maturity.28 NeGoriasté InstRuvenrs Law Mave Easy 4.1. Example: September 1, 2006 Pay to the order of Maria the sum of P1,000.00 thirty (30) days after sight. (Sad) Jose To: Jesus This is a bill of exchange payable thirty (30) days after sight. Let us suppose that Jose presented the instrument for acceptance to Jesus only on September 9, 2006, and Jesus accepted but did not place the date of his accep- tance. In this case, Jose must insert the date “September 9, 2006” which is the true date of the acceptance by the drawee of the bill of exchange; and the instrument will be paid accordingly on the date of its maturity on October 9, 2006. 4.2. However, suppose Jose presented the in- strument for acceptance to Jesus on September 9, 2006, as illustrated above, but Jesus delayed the ac- ceptance and manifested his acceptance of the bill only on September 11, 2006, what is the true date of acceptance in this case? The answer is September 9, 2006 because Jose can insist that the acceptance be the date when it was first presented and seen by the drawee Jesus. 5. What is the rule in the case of an undated instru- ment (where the date is material to determine its maturity) and the holder wrote the wrong date thereon? 5.1 Section 13 merely states that “(t)he inser- tion of a wrong date does not avoid the instrument in the hands of a holder in due course.” Hence, the clear inference therefore is that in the hands of a holder who Is not a holder in due course, the instrument is FoRM AND INTERPRETATION 29 avoided. That being the case, such holder cannot run after the maker or drawer of the instrument. 5.2 However, if the instrument where a wrong date was inserted is already in the hands of a holder in due course, then that instrument remains valid; and insofar as such holder in due course is concerned, the wrong date shall be deemed to be the true date. SECTION 14. Blanks; when may be filled. Where the instrument is wanting in any material par- ticular, the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. And a signature on a blank paper delivered by the person making the signature in order that the pa- per may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any amount. In order, however, that any such ins strument when completed may be enforced against any person who became a party thereto prior to its completion, it must be, filled up strictly in accordance with the authority given and within a reasonable time. But if any instrument, after completion, Is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands,-and ‘he may enforce it as if it had been filled up strictly in accordance with the au- thority given and within a reasonable time. 1. In the execution of negotiable instruments, the ‘two (2) steps involved are as follows: Firstly, the mechani- cal writing of the instrument completely in accordance with the requisites of negotiability under Section 1, NIL; and Secondly, the delivery of the instrument by the maker or drawer to the payee in order to give legal effect thereto. 2. It is the duty of the maker or drawer to issue a ‘complete instrument. If the maker or drawer is remiss in this duty, and the instrument is lacking in any material particular, the holder of the instrument has the prima facie30 NEGOTIABLE INSTRUMENTS Law MADE Easy authority to complete the instrument in accordance with the authority given and within a reasonable time. 2.1 A particular is material if it is essential to complete the instrument. Thus, the name of the payee or the amount, if left blank, may be filled in by the holder. 2.2 What is a reasonable time is dependent upon the circumstances of each case. In determining what is a “reasonable time”, regard is to be had to the nature of the instrument, the usage of trade or busi- ness with respect to such instruments, and the facts of the particular case.* 3. Rules as to incomplete but delivered instru- ments To hold a person who became a party to the instru- ment prior to its completion liable thereon to one who is not a holder in due course, the following requisites must con- cur: (a) the incomplete but delivered instrument must have been filled up strictly in accordance with the authority given; and (b) the completion of the instrument must have made within a reasonable.time after its issue. 3.1. However, if the instrument after its comple- tion is in the hands of a holder in due course, valid and effectual for all purposes in his hands, and he may enforce (the instrument) as if it had been filled up strictly in accordance with the authority given and within a reasonable.” 3.2 Example: FACTS: A issued a promissory note in fa- vor of B or order payable on December 10, 2006 and left the amount blank but with the specific in- struction given to place an amount not exceeding * Section 193, NIL. Fonu AND INTERPRETATION 31 10,000.00. However, B placed the amount of P 100,000.00 and negotiated the instrument to C. QUESTION: Can C go against A? 3.2.1 Yes, if C is a holder in due course, because the instrument is valid and effectual for all purposes in his hands, and he may enforce the promissory note as if it had been filled up strictly in accordance with the authority given and within a reasonable time. Therefore, C can go against A for P100,000.00. A and C are both in- nocent parties; but as between two innocent par- ties, the party who made possible the commis- sion of the wrong shall bear the loss. 3.2.2 No, if C is not a holder in due course, because to hold A liable it must be shown that the promissory note was filled up’ strictly in accordance with the authority given and within a reasonable time. in this case, the in- strument was not filled up in accordance with the authority given. Therefore, the promissory note is not valid and effectual in the hands.of C. Hence, C cannot go against A. 4. Signature on a blank paper A signature on a blank paper may be converted into a negotiable instrument only if the person who affixed such signature has such intention; in which case, the holder has the prima facie authority to fill it up for any amount. How- ever, if the person who signed a blank paper has no inten- tion of converting the same into a negotiable instrument (e.g. only for autograph purposes), the person in posses- sion thereof has no authority whatsoever to convert the signature on the blank paper into a negotiable instrument for any amount. Even if such instrument is in the hands of32 NeGoriaate InsTAUMENTS Law Mabe Easy @ holder in due course, the latter cannot make the signa- tory liable thereon. 5. An incomplete but delivered instrument can be put up as a defense only against a person who is not a holder in due course. As such, therefore, it is only a per- sonal defense. 5.1 However, the holder not in due course can go against parties subsequent to the completion but not against parties prior to the completion of the in- strument. 6. An incomplete but delivered instrument cannot be put up as a defense against a person who is a holder in due course. A personal defense cannot prevent a holder in due course from enforcing the instrument. 6.1 Consequently, therefore, the holder in due course can go against all parties to the instrument re- gardless of whether they are parties prior to or subse- quent to the completion of the instrument. SECTION 15. Incomplete instrument not deliv- ered.—Where an incomplete instrument has not been delivered, it will not, if completed and negotiated with- ‘out authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery. This section involves an instrument which is incorn- plete and undelivered. This is a case where the two steps in the execution of a negotiable instrument were not com- : ie., (1) the mechanical writing of the instrument and (2) the delivery of the instrument. Conse- quently, an incomplete and undelivered instrument has no legal effect. Font aNo INTERPRETATION 33 1. No rights can arise in respect of any i under the Negotiable Instruments Law until it is delivered.” What is of decisive importance is the delivery of the in- strument. The delivery of the instrument is the final act essential to its consummation as an obligation. An unde- livered bill or note is inoperative. Until delivery, the contract, is revocable.” 1.1. Insimple pariance, delivery gives life to the instrument. Without delivery, the instrument is dead, s0 to speak. 2, An incomplete and undelivered instrument is a real defense. It can be put up as a defense even as against a holder who is a holder in due course. This is so because an incomplete undelivered instrument, if com- pleted and negotiated without authority, is not a valid con- tract in the hands of any holder as against a person who signed the instrument prior to its delivery. Note that the law says “any holder’. The law did not distinguish between a holder in due course and a holder who is not a holder in due course. Therefore, it includes both. As against a per- son whose signature was placed on the instrument prior to its delivery, he cannot be held liable on the instrument by the holder even if the holder is a holder in due course. 2.1 However, as against persons whose signa- tures are placed on the instrument after its delivery, they can be held liable thereon by the holder who is a holder in due course. ~ 2.2 Example: A executed a promissory in favor of B or order but left the amount blank and kept the instrument in his desk ® George A. Kautlman vs. The Philippine National Bank, 42 Phil Reports 182, 186 (1921), * People vs. Yabut, 78 SCRA 624 (1977).34 Necoriate Instruments Law Mane Easy drawer, B stole the note, entered the sum of P10,000.00, and negotiated the instrument to C; C to D; D to E, holder. \n the example given above, E cannot go against A, even if E is a holder in due course because the law says that the instrument is not a valid contract in the hands of any holder as against A whose signature was placed thereon prior to its delivery. However, E can go against B (the wrong doer who must answer for the consequences of his act), and C & D, Whose signatures were placed on the instrument after its delivery, because as general indorsers they warrant that the instrument is valid and subsisting’ and, as such, there- fore they are estopped to deny the validity of the instru- ment. SECTION 16. Delivery; when effectu: when presumed.—Every contract on a negotiable instrument is incomplete and revocable until delivery of the in- strument for the purpose of giving effect thereto. As between. immediate parties and as regards a remote party other than a holder in due course, the delivery, in order to be effectual, must be made either by or under the authority of the party making, drawing, accepting, or indorsing, as the case may be; and, in such case, the delivery may be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property in the instrument. But where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them Ilable to him Is conclusively Presumed. And where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is pre- ‘sumed until he coritrary is proved. 7 Section 68, NIL. Font aND INTERPRETATION 35 This section deals with an instrument that is complete but undelivered. As adverted to earlier, there are two acts involved in the making of a negotiable instrument. In this section, the first act of the mechanical writing of the in- strument completely was accomplished. However, the second act of delivery was not accomplished. Because there was no delivery, the maker or drawer therefore did Not intend to give legal effect to the instrument. For as long as the instrument remains undelivered, the instrument is ineffectual, and it may be revoked at will by the maker or the drawer, as the case may be. 1. Delivery by the maker or drawer to the payee who takes the instrument as holder thereof is the determinative act that gives legal effect to the instrument. Until the in- strument is delivered to the payee with the intention of transferring title thereto, the payee acquires no rights thereon and the maker or drawer cannot be held liable on* the instrument. 2. Delivery to be effectual must be made by or under the authority of the person making, drawing, accepting or indorsing the instrument. 2.1. Delivery, although instructed by the princi- pal, is not sufficient through an agent until the agent actually delivers the instrument to the payee for whom itis intended. 2.2 Mailing a negotiable instrument to the payee is sufficient delivery to give legal effect thereto. 3. Ordinarily, the delivery of the instrument implies the transfer of ownership of such instrument from one per- son to another. However, it may be shown that immediate parties intended the delivery for a purpose other than the transfer of ownership over the instrument. For example, the delivery of the instrument is only for purposes of collec- tion; hence, the transferee is merely instituted as agent of the holder of the instrument. In this case, there is no trans- fer of ownership over the instrument.i 36 NEGOTIABLE INSTRUMENTS Law Mave Easy 4. Once an instrument is no longer in the posses- sion of a party whose signature appears thereon, the prima facie presumption is to the effect that the delivery of the said instrument to the holder thereof is valid and inten- tional. However, if the said holder is a holder in due course, the valid and intentional delivery of the instrument is conclusively presumed. 4.1 Example: A executed a complete promis- sory note and kept the same in his desk drawer. B stole the note and negotiated the instrument to C, holder. 4.1.1 Since the note is no longer in the possession of A who signed the instrument, a prima facie presumption of delivery arises in fa- vor of C, the holder. Inasmuch as the presump- tion is only prima facie in nature, proof to the contrary may be presented by A that there was no delivery of the instrument to B and that the latter stole the same. If proven in this case, the presumption is destroyed and C cannot go against A, unless C can prove that he is a holder in'due course. 4.1.2 If C can show that he acquired the instrument under the following circumstances, he will be deemed to be a holder in course: com- plete and regular upon its face; before it was overdue; for value and in good faith; and with no notice of any defect of ttle or equities between the parties.” As such holder in due course, the valid and intentional delivery of the instrument by A to B is conclusively presumed; hence, A can- not be allowed to prove the contrary. In this case C.can go against A. * Section 62, NIL FoRM Ano INTERPRETATION 37 SECTION 17. Construction where instrument is ambiguous.—Where the language of the instrument is ambiguous or there are omiseione therein, the fallaw- ing 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 uncer- tain, reference may be had to the figures to fix the amount; (b) Where the instrument provides for the pay- ment 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, dated as of the time it was issued; (d)_ Where there is a conflict between the written and printed provisions of the instrument, the written provisions prevail; (e) Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his electior (f) Where a signature is so placed upon the in- strument that it is not clear in what capacity the per- son making the same intended to sign, he is to be deemed an indorser; (g) Where an instrument containing the word promise to pay” is signed by two or more persons, they are deemed to be jointly and severally liable thereon. 1. Rules of construction of ambiguous language in the instrument: a) As between the sum payable which is pressed in words and that expressed in fi38 NeGoriaBle Instruments Law Mabe Easy ures, the one expressed in words shall pre- vall. However, if the one expressed in words are uncertain, reference may be made to the figures to fix the amount of the sum payable. b) In the event the instrument provides for the payment of interest but the instrument does not state the date when the interest shall commence to run, then the interest shall be- gin to run from the date of the instrument; but if the instrument does not bear a date, the in- terest shall begin to run from the date of the issue of the instrument. c) When the instrument is undated, it will be dated as of the day the instrument is issued. d) As between written and printed provisions, the written provisions shall prevail e) Where the instrument itself is so ambiguous that it cannot be determined with certainty whether it is a promissory nate or a bill of ex- change, the holder may treat it as either at his option, Example: | promise to pay Pablo Pablo or order the ‘sum of P1,000.00. (Sad) Jose Jose To: Antonio Antonio The instrument appears to be a promissory note be- cause of the use of the phrase “I promise to pay"; but at the same time, the instrument appears also to be a bill of exchange because of the presence of a drawee. In this case, the holder may treat the instrument elther as a prom- issory note or a bill of exchange, at his option, FORM AND INTERPRETATION 39 f) In case a party to the instrument signed the instrument in such a way that it cannot be determined whether he did so as a maker, drawer, acceptor or indorser, then he will be considered to have signed the instrument as an indorser. 9) {6 an instrument containing the phrase “I promise to pay" is signed by two or more Parties thereto, all of them are solidarily 1- able thereon.” However, if the promissory note is in the plural form and contains the phrase "We promise to pay,” the parties are only liable jointly. SECTION 18. Liability of person signing in trade or assumed name.—No person is liable on the instru-, ment whose signature does not appear thereon, ex- cept 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. 1. General Rule: No person can be held liable on the instrument i his signature does not appear thereon. 1.1. Thus, the drawee is not liable on the it strument unless he accepts the same. However, once the drawee accepts the instrument, he becomes the acceptor and, as such, the person primarily liable thereon.” ° Parot vs: Gemora, 7 Phil. 94; Planters Bank vs. CA, 216 SCRA 738 (1992), Ibid,40 Necorae.e InstRUMENTS Law MaDe Easy 2. Exceptions: a. A person who signs in an assumed name or trade name. b. The signature of a party made by a duly au- thorized agent. '" The forger, in cases of forgery, who forges the signature of another person.” d. Under Section 134, NIL, in acceptance by a separate instrument. @. - Under Section 135, NIL, involving an uncon- ditional promise in writing to accept a bill be- fore itis drawn. 1. The holder who negotiates an instrument payable to bearer by mere delivery is liable thereon." SECTION 19. Signature by agent; authority; how shown.—The signature of any party may be made by a duly authorized agent. No particular form of appoint- ment is necessary for this purpose; and the authority of the agent may be established as in other cases of agency. \ SECTION 20. Liability of person signing as agent, and so forth.—Where the instrument contains ora person adds to his signature words indicating that he signs for or on behalf of a principal or in a repre- sentative capacity, he is not liable on the instrument if he was duly authorized; put the mere addition of words describing him as an. agent, or as filling a repre- sentative character, without disclosing his principal, does not exempt him from personal Ii 1 Section 19, NIL. ® Section 23, NIL. ® Section 65, NIL. Form AND INTERPRETATION a SECTION 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. 1, If a person authorizes another to sign an instru- ment for and in his own behalf, that is good as if he signed the instrument personally. 2. The authority of the agent may be given verbally or in writing as no form of appointment is required by law, except only in cases covered by the statute of frauds, 8, Requisites to negative personal liability of agent: a) He must be duly authorized; b) He must act within the scope of his authority ©) He must indicate in the instrument that he is* signing merely as agent; and d) He must disclose his principal. All the above requisites must concur; otherwise, the agent can be held personally liable on the instrument. 4, Signature by procuration. This may also be dicated by the abbreviation “Per proc’, or the initials “PP, or" P.p” A signature per procuration is a notice that the agent has limited authority, and the principal is bound on the instrument only if the agent signed within the limits of his authority. Hence, anybody dealing with an agent per proc does s0 at his own peril. SECTION 22. Effect of indorsement by infant or corporation—The indorsement or assignment of the instrument by a corporation or by infant passes the property therein, notwithstanding that from want of capacity, the corporation or infant may incur no liabil- ity thereon,42 Necoriaste InstaUMENTS Law Mae Easy 1. As a general rule, a minor does not have the ca- pacity to contract; and any contract entered into by him is considered voidable. Hence, the minor cannot be held liable. 2. A corporation can only perform acts which are within the scope of its powers; otherwise, all acts done outside of its powers are considered ultra vires and can be avoided. Hence, the corporation cannot be held liable. 3. Nonetheless, indorsement of an i minor or a corporation acting ultra vires, passes title thereon and the indorsee acquires ownership over such instrument as holder, such that he can enforce payment thereon against all prior parties. 4. Example: ‘A, maker, executed a promissory note payable to the order of B, payee, who is a minor. B indorses the note to ©; C to D, holder. Although B is a minor, his indorsement passes title over the note to C; and C can negotiate the instrument to D, as holder. D can not enforce payment against B, minor, who cannot be held liable on the note as the instrument is voidable at his instance or at the instance of his guardian. D can go against A (maker)"* and C (indorser)"® because they cannot put up the minority of B as a defense due to ies, i.e., the existence of the payee and his then capacity to indorsee; that the instrument is valid and subsisting, respectively. SECTION 23. Forged signature; effect of — When a’signature is forged or made without the au- thority of the person whose signature It purports to be, it is wholly inoperative, and no right to retain the in- strument, or to give a discharge therefore, or to en- * Section 60, NIL. * Section 86, NIL: Foam ano INTERPRETATION 43 force 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 tight is precluded from setting up the forgery or want of authority. Section 23 applies only to forged signatures or signa- tures made without authority, and to no other case. It does not apply to altered amounts or other matters that alter the effect of the instrument; in which case, Section 124 on material alteration will govern, 1. Section 23 above states the general rule, the ef- fect of forgery and the exception to the rule, thus: a) The general rule is that the forged signature or signature made without authority is wholly inoperative; although the instrument itself remains to be operative. , b) The effect is that no right to retain the in- strument, or to give a discharge therefore, or to enforce payment thereof against any party thereto, can be acquired through or under such forged signature or made without au- thority. ©) The exception to the rule is when the party against whom it is sought to enforce such in- strument is precluded from setting up the forgery or want of authority. 2. The following are precluded from setting up the defense of forgery: a) The indorsers of instruments payable to or- der. Example: A maket executed a promissory note payable to the order of B, payee. B lost the note. X found it, signed thei i $ f ; 4 44 Negoriaste InsTRUMENTS Law Mane Easy name of B and negotiated the instrument to E, holder. E can go against D, C and X (forger). They are pre- cluded from putting up the defense of forgery because as general indorsers they warrant that the instrument is genu- ine and in all respects what it purports to be and that the instrument is valid and subsisting. X is deemed to have signed in an assumed name and, therefore, has the same warranties as a general indorser. However, E cannot go against B because B neither signed the instrument, nor authorized X to sign for him.” So, also, E cannot go against A, maker, because the forged signature of B is wholly inoperative and did not validly transfer title over the instrument to C. Thus, insofar as A is concemed, what C acquired are only the rights of a forger which was transferred to D and thence to E, holder. Therefore, E has no right to retain the instrument or to enforce payment thereof as against A. N.B. In cases of this nature, the cut-off formula may be used to determine the liabilities of parties to the holder of the instrument. Consider the example given above: to to 18 Section 66, NIL. "’ Sections 18 & 19, NIL. Fon AND INTERPRETATION 45 A (maker) {above cut-off) | B (payee; lost the note) = _> ourore — C (indorser) (below cut-off) i (forger) x D (indorser) { . E (holder) The cut-off is at the point where the forgery occurred. All those above the cut-off cannot be held liable by the holder. All those below the cut-off are liable to the holder. b) The forgery of the indorsement of a party an instrument payable to bearer because such forged indorsement is not necessary to the title of the holder since bearer instru- ments can be negotiated by mere deliver. ©) The acceptor in a bill of exchange. Example: X (forger) executed a bill of exchange by signing the name of Y as drawer, making himself (X) as payee of the instrument and addressed the bill to Z as drawee. Then X (forger-payee) negotiates the bill to A who presents the instrument to Z for acceptance. Z accepts and signs the bill as acceptor.RV aRaR en reo ema me REE 46 Necoriaate IstauMents Law Mane Easy Questions: Can Z later refuse to pay the bill by put- ting up the defense of forgery of the signature of the drawer? The answer is No, Z is precluded from putting up the defense of forgery. As acceptor, Z warrants the genuiness of the signature of the drawer.® 4d) The forger. (Please see example in 2(a) hereof.) e) Those under estoppel by their declaration, act or omission."* Example: X (forger) executed a promissory note by signing the name of Yas maker, making himself (X) as payee of the instrument. Then X (forger-payeé) negotiates the note to A; but before accepting the note, A asks Y if everything is in order with the note to which Y says: “Yes, That's OK!" In this case, Y is precluded from putting up the defense of forgery because by his declaration, he is estopped from denying the validity of the instrument. 3. Forgery of a check where payee’s signature is forged. Example: A (drawer) signed a check payable to B (payee), drawn against RCBC Bank, as drawee bank. C fraudu- lently obtained said check and forged the signature of B as indorser to himself (C, forger). Then C personally signs the check and deposits the check to his account at PCIBank. Then PCIBank indorsed the check to RCBC Bank which paid the amount and consequently charged the account of A, drawer. 18 Section 62, NIL. * Section 2, Rule 131, Rules of Court. FoaM aND INTERPRETATION 47 What are the rights and liabilities of the parties in this case? a) RCBC Bank cannot charge the account of drawer A. RCBC as depository bank has the contractual obliga- tion to A as depositor to pay only the person designated by the drawer as payee or his order and no other. b) Since A suffered no damage inasmuch as RCBC Bank cannot charge the drawer’s ac- count, A is still liable to B for the former's outstanding obligation. ©) PCIBank, as collecting bank, is liable as in- dorser to RCBC Bank. PCIBank shall bear the loss. Its only remedy is to go against the forger. ‘As succinctly held by the Supreme Court in Great Eastern Life Insurance Co. vs. Hongkong & Shanghai Bank.” ‘Where a check is drawn payable to the or- der of one person and is presented to a bank by another and purports upon its face to have duly endorsed by the payee of the check. itis the duty of the bank to know that the check was duly en- dorsed by the original payee, and where the bank pays the amount of the check to a third person, who has forged the signature of the payee, the loss falls upon the bank who cashed the check, and its only remedy is against the person to whom it paid the money.” d) A, drawer, cannot go against PCIBank be- cause there is no privity of contract between them, * 43 Phil. 678 (1922)48 Necoriaste InsTRUMENTS Law Mae Easy 4. Forgery of a check where drawer’s signature is forged. Example: X stole an Allied Bank Check of Y. X then placed his name on the check as payee and thereafter signed the name of Y. After personally signing his name at the back of the check, X encashed the check at Allied Bank which paid and charged the amount to the account of Y. In this example, Allied Bank cannot charge the ac- count of Y. Said the Supreme Court in the case of San Carlos Milling Co., Ltd. Vs. Bank of the P.I. and China Banking Corporation:** “A bank is bound to know the signatures of its customers; if it pays a forged check, it must be considered as making the payment out of its funds, and cannot ordinarily charge the amount 80 paid to the account of the depositor whose name was forged.” CASES 1. The instrument in order to be considered negotia- bble must contain the so-called “words of negotiability—i.e., must be payable to “order” or to “bearer”. (Salas vs. Court of Appeals, 181 SCRA 296 [1990}). 2. The negotiability or non-negotiability of an instru ment is determined from the writing that is from the face of the instrument itself. (Caltex [Phil], Inc. vs. Court of Ap- peals, 212 SCRA 448 3. Persons writing their names on the face of the promissory notes are makers. (Astro Electronic Corp. vs. Phil. Export and Foreign Loan Guarantee Corporation, 411 SCRA 462 [2003)). 2 59 Phil, 59 (1933), citing 7 C.J, 683, Fonu Avo INTERPRCTATION 49 4. Anote payable to a specific person is covered by the general provisions of the New Civil Code, not the Ne- gotiable Instruments Law. (Garcia vs. Llamas, 417 SCRA 292 (2003). 5. A forged signature is “wholly inoperative” and payment made “through or under such signature” is inef- fectual or does not discharge the instrument. (Samsung Construction Company Philippines, Inc. vs. Far East Bank and Trust Company, 436 SCRA 402 [2004]). 8. A forged signature is a real or absolute defense, and a person whose signature on a negotiable instrument is forged is deemed to have never become a party thereto and to have never consented to the contract that allegedly gave tise to it. (Bank of the Philippine Islands vs. Casa Montessori Internationale, 430 SCRA 261 [2004)).CHAPTER II CONSIDERATION SECTION 24. Presumption of consideration.— Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears thereon to have become a party thereto for value. SECTION 25. Value, what constitutes.—Value is any consideration sufficient to support a simple con- tract. An antecedent or pre-existing debt constitutes value; and is deemed such whether the instrument is payable on demand or at a future time. 1. Consideration is some tight, interest, benefit, or advantage conferred upon a promisor, to which he is oth- erwise not lawfully entitled, or any detriment, prejudice, loss or disadvantage suffered or undertaken by the pro- misee other than to such as he is at the time of consent bound to suffer.” 2. Valuable consideration means in general terms, some tight, interest, profit or benefit to the party who makes the contract, or some forebearance, detriment, loss, responsibility, etc. on the other side”? 2.1 Simply put, valuable consideration may be defined as the obligation of contracting parties to give, to do or not to do as the cause or motive for the con- tract or its reason for being. 2 Gabriel vs. Monte de Piedad, 71 Phil. 501. ® Walker Rubbers. Corporation vs. Nederlandsch Indische Han- delsbank, 105 Phil. 939. 50 Gonsioenarion 51 3. Like any other contract, a negotiable instrument must be supported by valuable consideration. Under the law, valuable consideration is presumed, even if the words “Fat Value Received" is not written on the instrument. However, this is oniy a prima facie presumption; hence, it admits of evidence to the contrary. But whoever alleges absence of consideration has the burden of proof to show the contrary. 4, Value is any consideration sufficient to support a simple contract. Consideration is important to determine whether or not a holder is a holder for value. A holder who is not a holder for value cannot be a holder in due course. 5. What the law requires is valuable consideration, not sufficiency or adequacy of consideration. Sufficiency is distinguished from adequacy in that the formers refers to the value given as to whether it is enough or not; whereas, the latter refers to the commensurateness of the transac-" tion as to whether the value given by one to the other is equivalent to each other. Example: A prime property in Makati City with a market value of P25,000.00/sq.m. was sold by Esmeralda for only P10,000.00/sq:m. to Tiburcio, in connection with which the latter issued a check to the former to conclude the sale. After encashment, Esmeralda cannot complain that the sum given is not adequate for the property sold (Please see Art. 1355, CC.) The law presumes that a man is capable of managing his own affairs, and whether his bargains are wise or unwise is not a proper question for either a legal or equitable tribunal. 6. A pre-existing debt constitutes value. So does services rendered.or to be rendered. But love and affection is not. SECTION 26, What constitutes holder for value.—Where value has at any time been given for the instrument, the holder is deemed a holder for value inRRA TS aE EEARM B LLL as 52 NeGoriaste Instruments Law Mape Easy respect to all parties who become such prior to that time. 1. A party who gives valuable consideration for the instrument is a holder for value. In the same manner, the holder (who is the last indorsee of an instrument) is also considered a holder for value with respect to all persons who became parties to the instrument prior to the time it i shown that valuable consideration had been given. 2. Example: A issued a promissory in favor-of B or order out of love and affection. B negotiates the note to C as a birthday gift. C negotiates to D for services tendeted; D to E, holder. E is a holder for value with respect to C, B & A (even if no valuable consideration was given by one to the other) because from the time of D valuable consideration was, shown to have been given; and they are parties to the instrument prior to the time valuable consideration was given. SECTION 27. When lien on instrument consti- ‘tutes holder for value.—Where the holder has a lien on the instrument, arising elther from contract or by im- plication of law, he is deemed a holder for value to the extent of his lien. Example: A issued a promissory note in favor of B or order for 1,000.00 in exchange for one sack of sugar. It so hap- pens that B owes C P800.00 and C wanted to collect the ‘sum from B. To settle his obligation, B negotiated the note toc. Jn this example, C has a lien on the instrument to the extent of P800.00 only. Therefore, C is a holder for value to the extent of P800.00 which is his lien on the instrument. With respect to the P200.00, C is not a holder for value Consiognation 53 thereof because he did not therefor. valuable consideration SECTION 28. Effect of want of consideration.— Absence or failure of consideration is a matter of de- fense as against any person not a holder in due course; and partial failure of consideration is a de- fense pro tanto, whether the failure is an ascertained and liquidated amount or otherwise. 1. There is absence of consideration if no considera- tion is given, or the consideration is illegal. 2. There is failure of consideration if the agreed consideration did not materialize. Partial failure of consid- eration is a defense pro tanto, meaning to the extent of the failure. 3. Absence or failure of consideration is only a per-> sonal defense because it is a good defense only as against a holder who is not a holder in due course. It can- not be put up as a defense against a holder in due course. 4. Example: A issued a promissory note to B or order as a birthday gift. B negotiated for value to C; C to D; D to E, holder. If E is not a holder in due course (e.g. E obtained the note after it is overdue), A can put up the defense of want of consideration and E cannot enforce the instrument against A. However, if E is a holder in due course, E can 90 against A because want or absence of consideration is only a personal defense which cannot be put up against a holder in due course. SECTION 29. Liability of accommodation party. —An accommodation party is one who has signed the \strument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose ‘at lending his name to some other person. Such a person is liable on the instrument to a holder for value,AOA VINALY LSP Pees en ena 54 Negoriave INsTauMENTS Law Mave Easy notwithstanding such holder, at the time of taking the instrument, knew him to be only an accommodation party. 1. Requisites to be an accommodation party:”* a) The party to the instrument signs as maker, drawer, acceptor or indorser; b) without receiving value therefor; and ¢) for the purpose of lending his name to some. other person. If all the above requisites concur, the accommodation party is liable to the holder for value of the instrument even if such holder knew that he only lent his name to accom- modate another person. 2. It is not a valid defense that the accommodation party did not receive any valuable consideration when he executed the instrument. It is not correct to say that the holder for value is not a holder in due course merely be- cause at the time he acquired the instrument he knew that the (party) was only an accommodation party. ** 3. The accommodation party is liable to the holder for value of the instrument in the capacity that he signed. But the accommodation party is not liable to the accom- modated party. As a matter of fact, if the accommodation party is held liable by the holder for value, the accommeda- tion party is entitled to be reimbursed by the accommo- dated party. 4. Example: Pedro wanted to borrow money from Juan. However, Juan was willing to give the loan only if Pedro can get Pablo to sign a promissory note in his favor. Hence, with- out receiving any” valuable consideration, the following Promissory note was extended by Pablo: * Lim vs. Saban, 447 SCRA 232 (2004), ‘Ang Tiong vs. Ting, 22 SCRA 713 (1968). Consiverarion 55 100,000.00 Manila, Philippines April 30, 2006 | promise to pay to the order of Pedro the sum of One Hundred Thousand Pesos (P100,000.00), payable thirty (30) days after date. (Sgd) Pablo Then Pedro negotiated the instrument to Juan. There- upon, Juan loaned Pedro the amount of P100,000.00. In the above example, Pablo is the accommodation party signing as maker; Pedro is the accommodated party; Juan is the holder for value of the instrument. Juan can hold Pablo liable on the note as maker even if the former, knew that the latter is only an accommodation party. Pablo” cannot put up the defense of absence of consideration. In the event Pablo pays the instrument, he is entitled under the law to be reimbursed by Pedro. Although Pedro signed only as an indorser (ordinarily only secondarily liable), as an accommodated party, Pedro is really the person primar- ily liable on the instrument. CASES 1. In actions based upon a negotiable instrument, it is unnecessary to aver or prove consideration, for consid- eration is important and presumed from the fact that it is a negotiable instrument. (Ong vs. People, 346 SCRA 117 (2000). 2, Section 24 of the Negotiable Instruments Law creates a presumption that every party to an instrument acquired the same for a consideration or for value. (Yang vs. Court of Appeals, 409 SCRA 159 [2003)). 3. Under Section 29 of Act 2031, an accommodation party is liable for the instrument to a holder for value evenDT ISREE EMOTE EVE TH BER AI B 56 NEGOTIABLE INSTRUMENTS Law Mane Easy if, at the time of its taking, the latter knew the former to be only an accommodating party. (Garcia vs. Llamas, 417 SCRA 292 (2003). 4. The relationship of an accommodation party and the party accommodated is in effect one of principal and surety, such that after making payment an accommodation party has the right to claim reimbursement from the party accommodated. (Caneda, Jr. vs. Court of Appeals, 181 SCRA 762 [1990}). 5. A holder of a check who is not a holder in due course cannot sue the drawer-accommodation party. (Stelco Marketing Corporation vs. Court of Appeals, 210 SCRA 51 [1992)). 6. Where the holder has a lien on the instrument arising from contract, he is deemed a holder for value to the extent of his lien. (Caltex {Phil.] Inc. vs. Court of Ap- peals, 212 SCRA 448 [1992].) CHAPTER iit NEGOTIATION SECTION 30. What constitutes negotiation.—An instrument is negotiated when it is transferred from ‘one person to another in such manner as to constitute the transferee the holder thereof. if payable to bearer, it is negotiated by delivery; if payable to order, it is, negotiated by the indorsement of the holder completed by delivery. SECTION 31. Indorsement; how made.—The in- dorsement must be written on the instrument itself or upon a paper attached thereto. The signature of the indorser, without additional words, is a sufficient in- dorsement. . SECTION 32. indorsement must be of entire in- strument.—The indorsement must be an indorsement of the entire instrument. An indorsemem which pur- ports to transfer to the indorsee a part only of the amount payable, or which purports to transfer the in- strument to two or more indorsees severally, does not operate as a negotiation of the instrument. But where the instrument has been paid in part, it may be in- dorsed as to the residue. 1. Negotiation is the process of transferring an in strument from one person to another so as to constitute the transferee the holder thereof. 2. If the instruments is payable to bearer, it is nego- tiated by mere delivery. Indorsement of the instrument is not necessary. The person who is the bearer in physical possession of the instrument is the holder thereof. 5758 Necoriste Instruments Law Mape Easy 3. If the instrument is payable to order, it is negoti- indorsement completed by delivery. The last in- dorsee in physical possession of the instrument is the holder thereof. 3.1. If an instrument payable to order is merely delivered without indorsement, the person in physical possession of the instrument cannot be considered the holder thereof. The transfer of such an instrument to constitute negotiation must be completed by in- dorsement; and only then will the transferee be taken to be the holder thereof. 4. Ordinarily, the indorsement is written at the back of the instrument. However, the indorser may write his indorsement anywhere in the instrument, or even on a separate piece of paper called an allonge which is at- tached to the instrument. 5. To constitute negotiation, the indorsement must be of the entire amount of the instrument. To indorse a partial amount, or to two or more indorsees severally will not constitute negotiation. 5.1 Example of partial indorsement. The in- ‘strument is for P1,000.00 and the indorsement is as follows: Pay to A P800.00 only 5.2 Example of indorsement to two or more payees severally. The instrument is for P1,000.00 and the indorsement is as follows: Pay to A P800 and to B P20 6. However, if an instrument has been paid in part, the unpaid balance may be indorsed. This usually occurs in instruments payable by stated installments. NeconiaTion 59 SECTION 33. Kinds of indorsement—An_ in- dorsement may be either special or in blank; and it may also be either restrictive or qualified or condi- tional. SECTION 34, Special indorsement; indorsement in blank.—A special indorsement specifies the person to whom or to whose ofser; the instrument is to be payable, and the indorsement of such indorsee is nec- essary to the further negotiation of the instrument. An indorsement in blank specifies no indorsee and an instrument so indorsed is payable to bearer and may be negotiated by delivery. SECTION 35. Blank indorsement; how changed to special Indorsement—The holder may convert a blank indorsement into a special indorsement by writ-, ing over the signature of the indorser in blank any’ contract consistent with the character of the indorse- ment. SECTION 36. When indorsement restrictive — An indorsement is restrictive which either— (2) Prohibits the further negotiation of the in- strument; or (b) Constitutes the indorsee the agent of the in- dorser; or (c) Vests the title in the indorsee in trust for or to the use of some other persons. But the mere absence of words implying power to negotiate does not make an indorsement restrictive. SECTION 37, Effect of restrictive indorsement; rights of indorsee.—A restrictive indorsement confers upon the indorsee the right— (a) To receive payment of the instrument;SST NOPE PATER PTOPELE PIETY ETT BERRIES 9 60 Negoriaave InsTauments Law MaDe Easy (b) To bring any action thereon that the indorser could bring; (©) To transfer his rights as such indorsee, where the form of the indorsement authorizes him to do so. But all subsequent indorsees acquire only the title of the first indorsee under the restrictive Indorsement. SECTION 38. Qualified indorsement.—A quali- fied indorsement constitutes the indorser a mere as- signor of the title to the instrument. it may be made by adding to the indorser’s signature the words “without recourse” or any words of similar import. Such an indorsement does not impair the negotiable character of the instrument. SECTION 39. Conditional indorsement.—Where an indorsement is conditional, the party required to pay the instrument may disregard the condition and make payment to the indorsee or his transferee whether the condition has been fulfilled or not. But any person to whom an instrument so indorsed is negoti- ated will hold the same, or the proceeds thereof, sub- ject to the rights of the person indorsing conditionally. 1. Kinds of indorsements: (@) Special indorsement (b) Blank indorsement (©) Restrictive indorsement (d)_ Quatified indorsement (e) Conditional indorsement 2. Special indorsement, also known as specific in- dorsement, is one where the indorser identifies the person to whom the instrument is transferred as holder thereof. In this case, the indorsement of the transferee is necessary to. the further negotiation of the instrument. Negotiation 61 3. Blank indorsement is one where the indorser merely ns his name without identifying the person to whom the instrument is transferred as holder thereof. In this case, the indorsement of the transferee is no longer necessary to the further negotiation of the instrument as the same may now be negotiated by mere delivery. 3.1 A blank indorsement will convert an instru- ment payable to order to one payable to bearer. In this case, the holder may write his name over the sig- nature of the indorser making it appear that the latter indorsed the instrument to him. However, the holder cannot write anything over the signature of the in- dorser which is not consistent with the character of the indorsement. Hence, the holder cannot write over the signature of the indorser the following, among others: “Protest waived” or “Notice of dishonor waived’, as they are material alterations of the con-” tract created thereby. 4, “Restrictive indorsement” is one where the transferee of the instrument does not acquire the full rights of the owner of the instrument as holder thereof. 4.1 There are three types of restrictive in- dorsements: ‘) Prohibits the further negotiation of the instrument. Example: Pay to Marina only. ] (Sgd) Antonio The instrument becomes payable to a specified per- son. Hence, it is no longer negotiable. b) Agency type of indorsementOPO O NE ETT PIS TEE ERE A 62 NEGOTIeLE INSTRUMENTS Law MADE Easy Example: Pay to Marina for collection. (Sgd) Antonio The indorsement makes Matina an agent of Antonio but only for purposes of collecting the proceeds of the instrument, ©) Trust type of indorsement Example: Pay to Marina in trust for Ada. (Sad) Antonio The indorsement passes title to Marina but she holds the same in trust for Ada. In this example, Marina cannot use the proceeds of.the instrument for her own use and benefit. 4.2. Rights of restrictive indorsee. a) To receive payment The holder in a restrictive indorsement has the right to receive payment of the instrument, unless the character of the indorsement is inconsistent with such right. Hence, if the agency type of indorsement is only “for deposit’, the holder in this case may not receive payment of the instru- ment but must merely deposit the instrument for and in behalf of the indorser. b) To bring any action The holder can bring any suit on the instrument that the indorser can bring. However, any defense available Necoration 63 against the indorser can also be brought against the holder, even if the holder brings the suit in his own name. ©) To transfer his rights when authorized by the form of the indorsement. The holder in a restrictive indorsement can further Negotiate the instrument if the indorsement contains the words of negotiability; otherwise, the holder cannot do so. Example: or order for collection (Sad) Antor This restrictive indorsement contains the words of rie- gotiability as the instrument is payable to order. It means that the instrument is payable to Marina or to whosoever Marina shall order to be paid as payee. Hence, in this re- strictive indorsement Marina can still negotiate the instru- ‘ment to another, but the latter shall acquire only the rights. of Marina, i.¢., to collect for and inhalf of the indorser who restrictively indorsed the instrument. The transferee of Marina can acquire no better rights than Marina, 5. Qualified indorsement 5.1 An indorsement becomes qualified by merely adding the following words to the indorser’s signature: “without recourse” or “sans recourse”, or words of similar import like “at your ov risk”. This kind of an indorsement will not destroy the negotiabil- ity of the instrument. However, the indorsement merely makes the indorser an assignor of his title to the instrument. As such assignor, he cannot ordinarily be held liable thereon, unless he violates his warran- ties under Section 65 hereof, to wit: