Consideration and Negotiation
Chapter II. Consideration
Define consideration
● Reason why a person or party would enter into a contract
● cause/ cost
● Not a requirement that the consideration must be provided/
written on the negotiable instrument in order for the instrument
to be considered negotiable -- why? Because there is already
a presumption under the law with respect to a consideration
Presumption of consideration - SEC 24
● Every negotiable instrument that has been issued, there is
already a presumption that there is a consideration in the
issuance of the negotiable instrument.
● It is not a requirement that there is a need to specify the
consideration on the negotiable instrument BECAUSE THERE
IS ALREADY A PRESUMPTION.
● Remember: presumption is considered as a disputable
presumption.
○ It can be disputed/ rebut by the party that there really is no
consideration that was given.
Define value - SEC 25 (3:15)
● It is a consideration sufficient to support a simple contract
● Not a requirement that the consideration given is equal to the
amount written on the negotiable instrument
○ E.g. the amount of the negotiable instrument is 10k then the
consideration given is only 5k. Can it be considered to be
valued? yes , because that is a consideration sufficient to
support a simple contract.
○ It is not a requirement that it has to be adequate
○ Remember: as provided under SEC 25 of Negotiable
instruments law, preexisting obligation or debt will be
considered as of value.
■ If you owed someone before, then you will issue a
negotiable instrument (PN), that preexisting obligation
would be considered a sufficient consideration it would
be considered as a value.
Who is a holder for value - SEC 26
● One who was given a valuable consideration to the instrument
issued/ negotiated to him
● If he was issued or negotiated with an instrument then he gave
a consideration for the consideration of that instrument upon the
issuance/ negotiation of that instrument and the person is called
the holder for value.
Lien on instrument constitutes holder for value - SEC 27
● Lien on the instrument - constitutes holder for value. Person has
a right to the instrument/ property, however what is that lien?
Right to possess, if the debt is still unpaid, a person has a right
to possess with respect to that property
o E.g. M - P = amount of instrument is 10,000
o P pledges the instrument to A = debt of P to A is 5,000
o A has a lien on the instrument, he has a right to possess the
instrument until the obligation is considered paid. If A is
already paid by P, he will return the instrument to P because
of the concept of contract of pledge.
o What will happen in case that the instrument is already due
and demandable. Can A go against M as for the payment of
10,000? Yes, because in this case he has a right to the
instrument, and the right to possess, ALSO carries the right
to recover the amount on the instrument. However, the holder
of value has a right ONLY TO THE EXTENT OF THE
LIEN in this case (5k). However also because he HAS THE
RIGHT TO THE INSTRUMENT, he can recover the 10,000
pesos. What if M paid 10,000 to A, what will happen? A will
receive 5k that is owed to him by P, and it is a requirement
upon him to return the excess to P, because in the first place,
he is only considered as a holder for value to the extent of
5,000.
Absence or failure of consideration - SEC 28
● Want or absence of consideration - Total lack of any valid
consideration for the contract
= personal defense
○ E.g. M-P-H
■ M issued a PN to P with a value of the note is 1M for a
consideration of a diamond ring, however P gave a fake
diamond ring. P negotiated the instrument to H. now that
the instrument is due and demandable, H will ask M for the
1M. However, M noticed that there was an absence/ want
of consideration because our consideration was a diamond
ring however P gave M a fake diamond ring. Can H recover
the 1M? Yes, because H is a considered a holder in due
course there is a presumption that when you are a holder,
you are considered as a holder in due course.
■ Same but H knew that there was no real consideration
given (fake diamond ring is not the consideration), now
that he is recovering the 1m from M, can M invoke the
defense absence/ want of consideration? Yes, because,
personal defense is available to a holder NOT in due
course.
● Failure of consideration - Failure or refusal of one of the parties
to do, perform or comply with the consideration agreed
○ E.g. M-P-H
■ Value of the note is now 10,000 for the consideration of
10 sacks of rice, because 1 sack of rice costs 1,000
therefore he gave a PN amounting to 10,000. P only
delivered 8 sacks of rice to M. P then negotiated the
instrument to H when the instrument became due and
demandable, he went to M for the payment of the
instrument. Can H go against M for the entire 10,000
even though the consideration lacks 2,000/ 2 sacks of
rice from what P delivered to M? Yes, because absence
or failure or partial failure is only a personal defense.
What if H is a holder NOT in due course? If there is only
a PARTIAL FAILURE, this is only a defense protanto. The
only defense that M can use will amount to 2,000 because
that is the only part that P was not able to deliver.
Therefore, it is a requirement upon M to pay H the amount
of 8,000.
Who is an accommodation party? - SEC 29
● An accommodation party is one who has signed the instrument as
maker, acceptor, indorser or drawer, without receiving value
therefore, and for the purpose of lending his name to some other
person. Such a person is liable on the instrument to a holder for
value, notwithstanding such holder, at the time of taking the
instrument, knew him to be only an accommodation party.
● M-P-Bank
○ P wants to borrow 1M however his standing isnt clean in the
 society, so the bank declined the loan to P. P then gave a PN
to the bank, but the bank refused to accept because they dont
believe that P will be able to pay the 1M. P then went to M
and asked him to issue P a PN in the amount of 1M. M will
lend P his name without receiving a value therefore. M made
a PN payable to P in the amount of 1M, he is called an
accommodation party, P is called the accommodated party.
Therefore P negotiated the instrument to the bank, when the
instrument is due and demandable, the bank will go to M
because he is primarily liable. Can M use the absence or
want of consideration? No, because in the first place he is
considered an accommodation party and an accommodation
party is considered primarily liable with respect to the
accommodation instrument.
○ If M pays 1m to the bank is the instrument considered
discharged? Not yet because the requirement for the
discharge is the principal debtor (P). he can ask
reimbursement to the principal debtor. When P pays M, the
instrument therefore is discharged.
○ What if during the time that the accommodation party
instrument is being made, P gave 10,000 because M lent him
his name to use so he can lend from the bank. Is that no longer
considered an accommodation party? No, that is still
considered a negotiable instrument.
Chapter III. Negotiation SEC 30 to 50
Define negotiation - SEC 30
● Transfer of the instrument from one party to another as to
constitute the transfery as the holder of that instrument.
Define issue and delivery - SEC 191
● Issue - it is the first delivery of the instrument that is complete in
form to a person receiving it as a holder.
○ M makes a PN, the first delivery to his first payee ← issue
● Delivery - transfer of possession actual or constructive, from one
person or another.
Manner of negotiation - SEC 30
● Order instrument - there must be an indorsement + delivery of the
instrument
● Bearer instrument - delivery only
Indorsement
Define - SEC 31
○ The writing of the name of the payee on the instrument, and
the purpose of which is to transfer that instrument from one
person to another
● Form of indorsement
○ Writing of the name of the payee
● Place of indorsement
○ It may be written on the instrument itself
○ Written on another piece of paper
■ Alaunch/ allonge - piece of paper where the indorsement
was written
Indorsement must be of the entire instrument - SEC 32
○ It is a requirement that the indorsement must be of the entire
instrument
○ “Must be of the entire instrument” - the entire amount in
the instrument must be indorsed.
■ M-P amount of note is 100,000. M issued the instrument to
P. P then indorsed the instrument to another person,
● “Pay to A” = valid indorsement
● “Pay to A 10,000 = not valid indorsement -- because the
requirement of the law is that the indorsement is of the
entire instrument.
○ Could it be possible for partial indorsement? Yes, if
the 9,000 has already been partially paid, and the
balance of 10,000 can be indorsed.
● “Pay to A 50,000 and to B 50,000 = not valid
indorsement
○ It is a requirement that the indorsement must be of
the entire instrument
● “Pay to A and B” = valid indorsement ← exception
because jointly is allowed as long as you don't mention
the specific amount
● “Pay to A OR B = not valid ← severally, because who
are you going to give it to?
■ Remember: instrument may be payable to
two or more payees jointly or severally
← pwede sa negotiability but for
indorsement jointly lang talaga to basta
ung ‘AND’
Kinds of indorsement - SEC 33
○ Special indorsement - SEC 34
■ The name of the payee is specified
Blank indorsement - SEC 34 (42:00)
■ Magiging bearer instrument
■ Conversion of blank indorsement to a special indorsement
● M-P-A-B
○ Payable to order. M issued instrument to P, and P indorsed
the instrument to A by way of special indorsement.
However A indorsed the instrument to B is only through a
blank indorsement, therefore that instrument will convert
into a bearer instrument. Inorder to protect B, he will have
to convert the blank instrument into a special indorsement
by writing his signature over A’s signature.
■ Restrictive indorsement - SEC 36 and 37
● The negotiability of the instrument can be destroyed.
Why? Because it is restrictive, it prohibits the further
negotiation of the instrument.
○ Pay to A only
○ Pay to A for collection ← agent
■ What if A transfers the instrument to B? B will only acquire
the right of A, an agent
○ Pay to A in trust for B ← trustee
Qualified indorsement - SEC 38
● Indorser is only an assignor
● “Without recourse” -- no guarantee in respect to that
instrument will be paid
● M-P-A
○ M made a PN to P amounting to 100,000. P then indorsed the
PN to A by way of a qualified indorsement, “pay to A
without recourse on me, signed P” then the instrument is
now due and demandable, A will ask for the payment from
M because he is a person primarily reliable, claiming the
100,000. M cant pay because he does not have money, he
is considered insolvent. Can A go against P if M cannot
pay because M is insolvent? No because the indorsement
is considered to be a qualified indorsement, because he
does not have a recourse to P. remember: the reason why
M cant pay is because he is insolvent.
○ ONLY PWEDE IS WHEN MAKER IS INSOLVENT(50
mins)
○
Conditional indorsement - SEC 39
● M-P-A
o M issued a PN payable to P 10,000. P said to his indorsement
“pay to A if A will pass the CPA board exam”, this is not
allowed if it is found on the face of the instrument.
Negotiability is different from indorsement. If you are to look
at the instrument, there is a due date, but the instrument
delivered by P is already due but A still hasnt passed the
CPALE, A went to M, can M pay A and disregard the
condition? Yes, the maker/ person liable of the instrument can
disregard the condition because in the first place according to
the supreme court, the debtor must have the burden in respect
to that debt. What will happen if A receives the 10,000? A will
NOT be the owner of the 10,000 because the condition is not
yet fulfilled, according to the law he is considered merely a
trustee in respect to that amount. Furthermore, if the condition
is met, that is only the time he will become the owner of the
10,000
Bearer instrument is always a bearer instrument - SEC 40
● No matter what, bearer instrument is always a bearer instrument
● A party making special indorsement is liable as indorser to a
holder who acquires title to his indorsement
○ M-P-A-B
■ M made a PN payable to bearer.
■ Suddenly P, instead of only delivery, he made it a special
indorsement to A.
■ Can A negotiate the instrument in way of a delivery? Yes,
because a bearer instrument is always a bearer
instrument. Because in the first place, the instrument
issued was originally a bearer instrument.
■ Scenario 2: what if B the instrument is already due and
demandable and is going after M for the payment, M then has
a real defense. B then will goafter those secondarily liable.
Can B go against P in respect of the amount? NO because a
party making a special indorsement is liable as indorser to
holder to acquires title to his indorsement. Can B go against
A? Yes because he acquired a title in reason of that delivery
so therefore he has title to that instrument. There is a warranty.
○ M-P-A-B)-C
■ M made a PN payable to bearer
■ Issued this instrument to P
■ P indorsed in way of special indorsement to A
■ A special indorsement also to B
■ The instrument is already due and demandable
■ B will go after M for the payment
■ M cannot pay because there is Forgery
■ Can B go against P? Yes because there is a warranty under
SEC 66 because he has acquired a title through special
indorsement so therefore B can recover to P.
■ P cant pay because he is insolvent, can B go against A? Yes
because he has acquired the title to the instrument
■ Add: B negotiated to C = delivery
■ M C went to M and M cant pay due to forgery
■ Can C go against P? No because a party making special
indorsement is liable as indorser to a holder who acquires title
to his indorsement.
■ Can C go against A? No because a party making special
indorsement is liable as indorser to a holder who acquires title
to his endorsement
■ Can C go against B? Yes because there is a warranty under
sec 65 under nego law.
Indorsement of two or more payees - SEC 41
● Jointly
○ “I promise to pay to the order of A and B”
■ How can the instrument be indorsed? All of them must be
indorsed.
■ Exception: if they are considered as a partner, because they
have authority to act in behalf of another person. If they are
NOT partners but have authority coming from another person
or other payee, its fine that only one will indorse the
instrument.
● Severally
○ “A or B”
■ According to the law, anyone of them may indorse
Rights of a Holder
1. Holder
a. is the payee or indorsee of a bill or note who is in
possession of it or the bearer thereof.
b. In general, a holder has the right to sue and to receive
payment
c. Sakanya naka address ung Negotiable instrument
2. Classes of holders
a. Holders in general (simple holders)
b. Holders in value
c. Holders in due course
3. Holder in due course -- to be considered as holder in due
course, the holder must have taken the instrument
a. That is complete and regular upon its face
b. Became the holder before it was overdue and without
notice that it has been previously dishonored, if such was
the fact;
c. Took it in good faith and for value; and
d. At the time it was negotiated to him, he had no notice of
any infirmity in the instrument or defect in the title of the
person negotiating it
4. As a rule: every holder is deemed prima facie to be an HIDC.
exception: when it is shown that the title of any person who
has negotiated the instrument was defective. But this is only
as regards a party who became such after the acquisition of
the defective title.
5. Rights of a holder in due course:
a. Hold the instrument free from defenses available to
parties among themselves
b. Hold the instrument free from any defect of title of prior
parties
c. Receive payment
d. Sue
e. Enforce payment of the instrument for the full amount
thereof against all parties liable;
6. Rights of a holder not in due course
f. He may receive payment and if the payment is in due
course the instrument is discharged
g. He is entitled to the instrument but holds it subject to the
same defenses as if it were non-negotiable
h. He may sue on the instrument in his own name
7. Shelter principle or holder in due course by subrogation
i. Under the “shelter principle,” the HIDC, by negotiating
the instrument, to a party not an HIDC, transfers all his
right to enforce the instrument as if he was an HIDC. the
principle applies to a “sheltered” holder who is not a
party to any fraud or illegality impairing the validity of
the instrument

Example:
1. Maria issued a negotiable promissory note to Pedro and
authorized the latter to fill up the amount in blank with his
loan account in the sum of P1,000.
However, Pedro inserted P5,000 in violation of the
instruction.
He negotiated the note to Anton who had no knowledge of
the infirmity.
Anton in turn negotiated said note to Beverly for value and
who had no knowledge of the infirmity.
Supposing Beverly endorses the note to Howard for value but
who has knowledge of the infirmity, can the latter enforce the
note against Maria?
Answer: Yes, because of the shelter principle in Negotiable
Instruments
Law, Howard is elevated to a status of a holder in due course
since a person not holder in due course steps in the shoes of
the prior party who is a holder in due course. Therefore,
Howard could enforce the note against Maria.
8. The defenses available against the holder are classified as
follows:
a. Real or Absolute Defenses – those that are attached to
the instrument itself and are available against all parties,
both immediate and remote, including holders in due
course.
b. Personal or Equitable Defenses –defenses which are
only available against a holder not in due course. Those
which grow out of the agreement or conduct of a
particular person which renders it inequitable for him,
though holding the legal title, to enforce it against the
party sought to be made liable
Presentment for payment
1. Meaning of presentment for payment
Presentation of the instrument to the person primary liable for the
purpose of demanding and receiving payment
2. Presentment for payment is not necessary to charge the
person primary liable.
The liability of the person primary liable is considered absolute.
When the instrument is due and remains to be unpaid, the holder
has the right to sue on the instrument. Unless the instrument is by
its terms, payable at a special place.
3. Presentment for payment is necessary to charge persons
secondarily liable.
The liability of persons secondarily liable is considered conditional.
4. Date of presentment for payment
a. If the instrument is payable at a fixed or determinable future
time, presentment must be made on the day it falls due
b. If the instrument is payable on demand (1) If PN – Within a
reasonable time after issue (2) If BOE – Within a reasonable
time after last negotiation
5. When is presentment for payment sufficient
a. Who will present?
(1) The holder
(2) Person authorized by the holder to receive payment on
his behalf
b. Time for presentment for payment At reasonable hour on a
business day.
c. Place for presentment for payment At a place provided under
Sec. 73
(1) Place specified in the instrument
(2) If not specified, the address of the person to make
payment
(3) If not specified or no address given, usual place of
business or residence of the person to make payment
(4) In any other case, wherever he may be found or at his last
known place of business or residence
d. To whom it will be presented
(1) To the person primary liable
(2) Any person found at the place where presentment is
made, ff the person primary liable is absent or
inaccessible,
6. Manner of presentment
a. The instrument must be exhibited to the person from whom
payment is demanded.
b. When the instrument is paid, the instrument must be
delivered to the person paying it.
c. Purpose of exhibition of the instrument
(1) To determine the genuineness of the instrument and the
indorsement.
(2) To determine the right of the holder to receive payment.
(3) To take possession of the instrument upon payment.
7. Presentment where instrument is payable at bank
a. Presentment must be made during banking hours.
b. Presentment may also be made at any hour before the bank is
closed if the person making the payment has no funds.
8. Presentment where principal debtor is dead and no place of
payment is specified
a. Presentment for payment must be made to his personal
representatives (executor or administrator).
9. Presentment to persons liable as partner and no place of
payment is specified
a. Presentment for payment may be made to any one of them.
10. Presentment to joint debtors not partners and no place of
payment is specified
a. Presentment must be made to all of them
11. When presentment not required to charge the drawer
12. When presentment not required to charge the indorser
a. The instrument was made or accepted for his accommodation
and he has no reason to expect that the instrument will be paid
if presented.
13. When delay in making presentment is excused.
a. The delay is caused by circumstances beyond the control of
the holder and not imputable to his default, misconduct, or
negligence.
When the cause of delay ceases to operate, presentment must
be made with reasonable diligence.
14. When presentment for payment is excused
a. Where, after the exercise of reasonable diligence,
presentment, as required by this Act, cannot be made;
b. Where the drawee is a fictitious person;
c. By waiver of presentment, express or implied.
15. When instrument dishonored by non-payment.
a. It is duly presented for payment and payment is refused or
cannot be obtained; or
b. Presentment is excused and the instrument is overdue and
unpaid.
16. Liability of person secondarily liable, when instrument
dishonored
a. Subject to the provisions of this Act, when the instrument is
dishonored by non-payment, an immediate right of recourse
to all parties secondarily liable thereon accrues to the holder.
17. Requirements to constitute payment in due course
a. Payment is made at or after the maturity of the instrument;
b. Payment is made to the holder of the instrument; and
c. 4 Payment must be in good faith and without notice that his
title is defective.
Notice of dishonor
1. Meaning of notice of dishonor
a. Bringing it to the knowledge of the indorser or drawer that
the instrument has been dishonored for non-payment or
acceptance.
2. Purpose of notice of dishonor
a. To inform the parties secondarily liable that the person
primary liable was not able to meet his engagement.
b. To require the parties secondarily liable to make payment.
3. Who will give notice of dishonor
a. The holder;
b. A person in behalf of the holder;
c. Any party to the instrument who may be compelled to pay it
to the holder and has the right of reimbursement from the
party to whom the notice was given; or
d. A person in behalf of such party mentioned in par.
4. Notice may be given by the agent of a party entitled to give
notice whether authorized or not.
5. When the instrument is dishonored in the hands of the agent,
he may
a. Give directly the notice of dishonor to the persons
secondarily liable;
b. Give notice to his principal
6. Form of notice
It may be oral or in writing. The only requirement is that the
instrument is sufficiently identified and that it has been dishonored.
7. Effect of lack of signature or insufficient notice
It would not invalidate the notice because it may be supplemented and
validated by verbal communication.
8. Misdescription of the instrument
It would not vitiate the notice unless the party to whom the notice is
given is misled thereby.
9. To whom notice will be given
a. To the party himself; or
b. His agent
10. Where party is dead
a. Notice must be given to his personal
representative
b. If there is no legal representative, notice must be
sent to the last residence or last place of business
of the deceased.
11. Notice to partners
Notice may be given to any one of the partners
12. Notice to person jointly liable Notice must be given to all of
them unless one of them has the authority to receive the notice
for the others.
13. Notice to bankrupt Notice may be given to the party himself
or his trustee or assignee.
14. Time within which notice must be given
a. Parties reside in same place
i. If notice is given at the place of business – it must be
given before the close of business hours on the day
following
ii. If notice is given at his residence – it must be given
before the usual hours of rest on the day following
iii. If sent by mail – it must be deposited in the post office
in time to reach him in usual course on the day following
b. Parties reside in different places
i. If sent by mail, it must be deposited in the post office in
time to go by mail the day following the day of dishonor,
or if there be no mail at a convenient hour on last day,
by the next mail thereafter.
ii. If given otherwise than through the post office, then
within the time that notice would have been received in
due course of mail, if it had been deposited in the post
office within the time specified in the last subdivision.
c. Where a party receives notice of dishonor, he has, after
the receipt of such notice, the same time for giving notice
to antecedent parties that the holder has after the
dishonor.
i. Where a party receives notice of dishonor, he has, after
the receipt of such notice, the same time for giving notice
to antecedent parties that the holder has after the
 dishonor.
d. Where notice must be sent
i. To the address given
ii. If no address
1. Either to the post-office nearest to his place of
residence or to the postoffice where he is accustomed
to receive his letters; or
2. If he lives in one place and has his place of business
in another, notice may be sent to either place; or (3)
If he is sojourning in another place, notice may be
sent to the place where he is so sojourning.

15. Notice of dishonor may be waived

a. If waiver is embodied in the instrument – such waiver is
binding to all parties
b. If the waiver is written above the signature of an indorser –
such waiver is binding only to him

16. When notice is dispensed with

Notice is dispensed with when, after the exercise of reasonable

diligence, it cannot be given to or does not reach the parties
sought to be charged.

17. When delay in giving notice is excused

Delay is caused by circumstances beyond the control of the

holder and not imputable to his default, misconduct, or
negligence.

Remember: When the cause of delay ceases to operate, notice

must be given with reasonable diligence.

18. When notice need not be given to the drawer

a. Where the drawer and drawee are the same person;

b. When the drawee is fictitious person or a person not having
capacity to contract;
c. When the drawer is the person to whom the instrument is
presented for payment;
d. Where the drawer has no right to expect or require that the
drawee or acceptor will honor the instrument;
e. Where the drawer has countermanded payment.

19. When notice need not be given to the indorser

a. When the drawee is a fictitious person or person not having
capacity to contract, and the indorser was aware of that fact
at the time he indorsed the instrument;
b. Where the indorser is the person to whom the instrument is
presented for payment;
c. Where the instrument was made or accepted for his
accommodation.

20. When notice of dishonor by non-acceptance has been given,

notice of a subsequent dishonor by non-payment is not necessary
unless in the meantime the instrument has been accepted.

21. Omission to give notice of dishonor by non-acceptance does not

prejudice the rights of a holder in due course subsequent to the
omission.