BLAW 2: LAW ON NEGOTIABLE INSTRUMENTS kinds of an accommodation party; (c) the rights and
liabilities of an accommodation party; and (d) the
UNIT 2: CONSIDERATION AND NEGOTIATION
Intended learning outcomes:
By the end of this module, students will be able to:
• Learn the meaning and requisites of
consideration that constitute a holder for value
and the legal implication of failure of
consideration.
• Explain who is an accommodation party, kind,
and liabilities and as distinguished from regular
party.
• Learn the different methods of transferring
negotiable instrument.
• Know the effects of indorsement and delivery
without indorsement.
• Distinguish assignment from negotiation;
• Familiarize with the different classifications and
requisites for every classification of indorsement.
Overview:
This unit is a brief synopsis of Consideration and
Negotiation of an Instruments covered by the
Negotiable Instruments Law subject and it provides
the students with understanding of: (a)
accommodation party, its kind, rights and liabilities;
(b) different methods of transferring negotiable
instruments; (c) classification of indorsement; and (d)
distinction of assignment from negotiation.
Topics to be discussed:
Consideration
• Accommodation Party
• Kind of Accommodation Party
• Rights and liabilities
• Accommodation Party vs. Regular Party
Negotiation
• Different methods of transferring negotiable
instruments
• Negotiation vs. Assignment
• Indorsement
• Kinds of indorsement
• Classification of indorsement.
Essential Questions:
a) How will you know that there is a failure of
consideration? Cite instances.
b) Why is it important to understand the different
kinds of accommodation party?
c) Distinguish negotiation from assignment.
LESSON 1: CONSIDERATION
I. Overview:
The topic will focus on Consideration in negotiable
instruments, specifically understanding and
knowing: (a) who is an accommodation party; (b)
difference between an accommodation and
regular party.
II. Objectives:
At the end of the lesson you should be able to:
• Learn the meaning and requisites of
consideration that constitute a holder for value
and the legal implication of failure of
consideration.
• Explain who is an accommodation party, kind,
and liabilities and as distinguished from regular
party.
III. Warm-Up Activity
Read again Sections 24 to 29 of The Negotiable
Instruments Law (NIL) plus whatever explanations,
annotations or descriptions you can find on the
subject.
IV. Content
Meaning of Consideration
• An inducement to a contract, that is, the cause,
price or impelling influence which induces a
contracting party to enter into the contract.
• The essential or most proximate purpose a party
has in view at the time of entering into the
contract.
Presumption of 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 24 of the NIL provides that 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.
• Like all other contracts, a negotiable instrument
must have a consideration or cause.
• Consideration does not necessarily be expressed
on a contract.
• It is presumed that negotiable instrument was
issued for valuable consideration.
• Consideration being presumed, it need not be
alleged or proved.
• However, the presumption is only prima facie.
Valuable Consideration
Sec. 25. Value, what constitutes. — Value is any
consideration sufficient to support a simple contract.
An antecedent or pre-existing debt constitutes
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value; and is deemed such whether the instrument is document, whether primarily or secondarily,
payable on demand or at a future time. even the holder for value knew that he
merely sign as accommodation party.
• Valuable consideration may *in general terms be Absence of consideration is not a valid
said to consist either in some right, interest, profit, defense against the holder for value.
or benefit accruing to the party who makes the
contract, or some forbearance, detriment, loss, 2. Liable primarily and unconditional. In lending
responsibility, act, labor, or service, on the other his name to accommodated party,
side.* (Story, on Promissory Notes, Sec 186). accommodation party is, in effect a surety.
As far as holder for value is concerned, he is
Holder for Value a solidary co-debtor.
Sec. 26. What constitutes holder for value. - Where
value has at any time been given for the instrument, b. Rights
the holder is deemed a holder for value in respect to 1. Right to revoke accommodation.
all parties who become such prior to that time. Considering the accommodation is
gratuitous, it may be revoked or rescinded by
• A holder for value is one who has given a cancellation or notice to those interested at
valuable consideration for the instrument issued any time before the instrument is negotiated
or negotiated to him. The holder is deemed as for value.
such not only as regards the party to whom value
has been given by him but also in respect to all 2. Right to reimbursement from
those who became parties prior to the time accommodated party. After making
when value was given. payment to the holder for value, the
accommodation party has the right to
• A holder of a negotiable instrument is presumed obtain reimbursement from accommodated
to be a holder for value until the contrary is party.
shown.
3. Right to contribution from other solidary
Absence or want of consideration accommodation maker.
• A total lack of any valid consideration for the
contract, in consequence of which the alleged Accommodation Party vs. Regular Party
contract must fall.
Accommodation Party Regular Party
Failure of consideration signs an instrument signs the instrument for
• The failure or refusal of one of the parties to do, without receiving value value
perform or comply with the consideration signs an instrument for does not sign for that
agreed upon. the purpose of lending purpose
his name to some other
• Consideration that has failed to materialized. person
always show by parol cannot disclaim or limit
Accommodation Party evidence that he is only his personal liability as
• A person who has signed the instrument as such, appearing on the
maker, drawer, acceptor, or indorser, without instrument by parol
receiving value therefor and for the purpose of evidence
lending his name to some other person. cannot avail of the regular party may avail
defense of absence or of said defense against
Kinds of accommodation party failure of consideration a holder not in due
a. Accommodation maker against a holder not in course
b. Accommodation drawer due course
c. Accommodation acceptor after paying the holder, may not sue any
d. Accommodation indorser may sue for subsequent party for
reimbursement the reimbursement
Liabilities and rights of accommodation party accommodated party
a. Liabilities
1. Liable in whatever capacity he signed the
instrument. The accommodation party is
liable on the instrument to a holder for value
in whatever capacity he has signed the

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 LESSON 2: NEGOTIATION o Delivery

I. Overview:
The topic will focus on Negotiation of an
instrument, specifically understanding and
knowing: (a) different methods of transferring
negotiable instruments; (b) the difference
between negotiation and assignment; and (c)
indorsement, its kinds and classification.
3. Assignment
• It is the less usual method, which may or may not
involve an indorsement in the sense of writing on
the back of the instrument.
• Transfer of the title to the instrument.
Negotiation vs. Assignment

II. Objectives: Negotiation Assignment

At the end of the lesson you should be able to: Refers only to Refers generally to
• Learn the different methods of transferring negotiable instruments ordinary contracts
negotiable instrument; Transferee is a holder Transferee is an
• Distinguish assignment from negotiation; assignee
• Know the effects of indorsement and delivery Holder in due course is Assignee is subject to
without indorsement; only subject to real both real and personal
• Familiarize with the different classifications and defense defense
requisites for every classification of indorsement. Holder in due course Assignee merely steps
may acquire better title into the shoes of
III. Warm-Up Activity than prior party assignor
Read Sections 30 to 50 of The Negotiable Instruments General indorser Assignor not warrant
Law (NIL) plus whatever explanations, annotations or warrants the solvency of the solvency of prior
descriptions you can find on the subject. prior parties parties unless expressly
stipulated or the
IV. Content solvency is known to
What constitutes Negotiation? him
Sec. 30. What constitutes negotiation. - An instrument Indorser is not liable Assignor is liable even
is negotiated when it is transferred from one person unless there be without notice of
to another in such manner as to constitute transferee presentment and notice dishonor
the holder thereof. If payable to bearer, it is of dishonor
negotiated by delivery; if payable to order, it is Governed by The Governed by Article
negotiated by the indorsement of the holder and Negotiable Instruments 1624 to 1635 of the Civil
completed by delivery. Law Code

• An instrument is negotiated when it is transferred Indorsement

from one person to another in such manner as to
constitute the transferee the holder thereof.
• Negotiation is the transfer of instrument from one
person to another made in such manner as to
constitute the transferee the holder thereof.
Three methods of transferring negotiable instrument
1. Issue
• It is the first delivery of the instrument, complete
in form, to a person who takes it as holder.
2. Negotiation
• It ordinarily involves indorsement (in regard to
other than bearer paper) so that “negotiation”
and “indorsement” are often used
interchangeably.
o Methods of Negotiation
a. Instrument Payable to Order
o Indorsement
o Delivery
b. Instrument Payable to Bearer
Sec. 31. Indorsement; how made. - The indorsement
must be written on the instrument itself or upon a
paper attached thereto. The signature of the
indorser, without additional words, is a sufficient
indorsement.
Sec. 32. Indorsement must be of entire instrument. -
The indorsement must be an indorsement of the
entire instrument. An indorsement which purports to
transfer to the indorsee a part only of the amount
payable, or which purports to transfer the instrument
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 indorsed
as to the residue.
• indorsement is writing of the name of the indorser
on the instrument with the intent either to transfer
the title to the same, or to strengthen the security
of the holder by assuming a contingent liability
for future payment, or both, completed by
delivery.

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• Must be written (writing or print) on the instrument
itself or upon paper attached(allonge) thereto.
• indorsement is necessary to the execution of an
instrument payable to the order of maker or
drawer (order instrument)
• must be of the entire instrument, cannot be
partial, unless the instrument has been partially
paid.

Kinds of indorsement
Sec. 33. Kinds of indorsement. - An indorsement may
be either special or in blank; and it may also be
either restrictive or qualified or conditional.

Classification
1. As to the methods of Negotiation:
a. Special ( Sec. 34); or
b. Blank.
2. As to the kind of title transferred:
a. Restrictive; or
b. Non-restrictive. (Sec. 36)
3. As to scope of liability of indorser;
a. Qualified; or
b. Unqualified or general.
4. As to presence or absence of limitations:
a. Conditional; or
b. Unconditional. (Sec. 39)
5. The other kinds of indorsement
a. Joint (Sec. 41.);
b. Successive (Sec. 50, 68);
c. Irregular or anomalous; and
d. Facultative. (Sec. 111.)

1. Act No. 2031, The Negotiable Instruments

Primary Law.
References 2. De Leon, Hector S & De Leon Hecotr Jr, M.
The Philippine Negotiable Instruments
Law (and Allied Laws) Annotated. Manila:
REX Book Store, 2004.
Other 1. Sundiang, Jose R. & Aquino, Timoteo B.
References Reviewer on Commercial Law. Manila:
REX Book Store, 2013.

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