NEGOTIOABLE INSTRUMENTS LAW
security, such arrangement does NOT change the status of a check
I. INTRODUCTION
Application and Purpose of Negotiable Instruments Law
1. The Act applies only to negotiable instrument or those
instruments which met the requirements laid down in Section 1 of
the law
2. Any case not provided for by the Act shall be governed by the
provisions of existing legislation or in default thereof, by the rules
of the law on merchant
3. The law was enacted for the purpose of facilitating, not hindering
or hampering transactions in commercial paper
Characteristics or Features of Negotiable Instrument
1. Negotiability – that which allows it to pass freely from hand to
hand in commercial markets
Note: the rule that one can pass no better title to
personal property than he himself has, does NOT apply
to negotiable instruments
2. Accumulation of Secondary Contracts – once an instrument is
issued, additional parties can become involved; such results or is
the consequence of passing the instrument from one person to
another
Q: Which contract is referred to by SECONDARY CONTRACT?
rd
A: First person to 3 person (ex. M to P to A = M and A contract)
Case: Firestone Tire and Rubber Co. vs. CA
- Withdrawal slips are NOT negotiable instruments because they do
not freely circulate. You are suppose to go to the bank where the
money was deposited and not to another bank.
Function and Importance of Negotiable Instruments
1. As a substitute for money – note that they do not constitute legal
tender; a negotiable instrument is valuable or worthless
depending upon the financial ability of the parties to them
2. As a medium of exchange for most commercial transactions – it is
the media of exchange for most commercial transaction; they
increase the purchasing medium in circulation
3. As a medium of credit transactions – debts; in case there is
nothing which can turn into cash at any moment
Note: check is primarily used for immediate payment, while the ordinary bill
of exchange and the promissory note are intended for the circulation of
credits.
Case: Mitra vs. People of the Philippines
- Checks are negotiable instruments and are substitute for money
and is protected by law
- Checks are used for convenience but should not be used in
detriment of the public, thus the rationale of BP 22
Case: BPI vs. Royeca
- Negotiable instrument is only a substitute for money and is not
money. The delivery of such instrument does NOT, by itself
operates as payment
Case: Cebu International Finance Corp vs. CA
- When you pay checks, it does not automatically extinguish the
obligation. Note that a check is not a legal tender, it is only
considered such once it is encashed
Case: State Investment House vs. CA
- Negotiable instrument’s function is to facilitate transaction in
commercial paper and not to hinder such transactions
1 angel‘s notes
- Just because you have private arrangement that the check is just a
as negotiable
Case: Osmena vs. Citibank
- Checks can be negotiated
- Negotiable instruments law was enacted to facilitate commercial
transaction
- Note because Osmena is not satisfied as to whom the check was
deposited, does not hinder the check to be negotiable
Case: Phil. Education vs. Soriano
- Postal money order is NOT a negotiable instrument as it cannot
be passed on to numerous bearer
- Postal money is only a mere exercise of government power for
the public benefit
Case: Serrano vs. CA
- Pawn tickets are NOT negotiable primarily because it does not
comply with the requisites provided for in section 1. Further, the
owner is the one who should redeem the property.
Forms of Negotiable Instruments
1. Common Forms – promissory note, bill of exchange and bank
check
- NIL deals only with two kinds of instruments:
i. Promissory notes – issuer has promised to
pay
ii. Bills of exchange – issuer has ordered a
third person to pay
2. Special Types - certificates of deposits, bank notes, due bill,
bonds, drafts, trade acceptances, and banker’s acceptances
Note: Where the meaning is doubtful, the courts have thus adopted the
policy of resolving IN FAVOR of the NEGOTIABILITY of the instrument. The
purpose obviously is to encourage the FREE CIRCULATION of the negotiable
papers.
II. GENERAL CONCEPTS
Non-Negotiable instrument
- Instrument which do not meet the requirements laid down in
section 1, or an instrument which in its inception was negotiable
but has lost its quality of negotiability
- Ex. Check payable only to a specified person – a negotiable
instrument ceases to be negotiable if the indorsement prohibits
the further negotiation of the instrument
- Covered by the provision of the Civil Code
- It may not be negotiated but may be ASSIGNED or TRANSFERRED
(Person who transfer or assign contractual or non-negotiable
rights pass only the rights that they had)
Money
- What is coined or stamped by public authority and has its value
fixed by public authority
- Means cash
- Medium of exchange; includes all legal tender
Promissory Note
- Is an unconditional PROMISE in writing made by one person to
another, signed by the maker, engaging to pay on demand, or at a
fixed or determinable future time, a sum certain in money to
order or to bearer
- 2 original parties: maker – one who makes the promise and signs
the instrument; payee – to whom the promise is made
- every person to whom an instrument is delivered is a holder
NEGOTIABLE INSTRUME NTSLAW
De Leon, Assigned Cases, Class Discussion
Note: the place and the date are not essential to the negotiability of the
instrument except in certain cases when the date is necessary to determine
when the note is due (ex. Thirty days after date)
The words “I promise to pay” or words of equivalent meaning is essential to
the negotiability of the instrument
Where no time for payment is expressed, an instrument is payable on
demand.
Bill of Exchange
- An unconditional ORDER in writing addressed by one person to
another, signed by the person giving it, requiring the person to
whom it is addressed to pay on demand or at a fixed or
determinable future time a sum certain in money to order or to
bearer
- If drawn on a bank and payable on demand, the order bill is, by
definition, called check
- Original parties:
o drawer – gives the order to pay money to a third party,
 does not pay directly;
o drawee – to whom the bill is addressed and who is
ordered to pay
 becomes an acceptor when he indicates a
willingness to accept responsibility for the
payment of the bill
o payee – party in whose favor the bill is originally drawn
or is payable
Note: a bill will be valid where there is only one party to it, for one may draw
on himself payable to his own order, that is , the two parties to the bill can
be the same person (drawer-drawee or drawer-payee)
Q: What is the idea and purpose of a bill of exchange?
A: The idea and purpose is that the drawer has funds in the hands of the
drawee of which the drawer whishes to avail himself, the drawer being the
party primarily interested in, and benefited by, the transaction
Q: What happens if the drawee refuses to accept?
A if he refuses to accept when he has funds for the purpose, he becomes
liable to the drawer for the resulting damages and the harm done to his
credit
CHAPTER 1 – FORM AND INTERPRETATION
DETERMINATION OF NEGOTIABILITY
Q: How do you determine the negotiability of an instrument?
A: What is controlling is not the intent of the parties, rather the FACE of the
instrument. Consider the following:
a. The whole of the instrument
b. Only what appears on the face of the instrument
c. The provisions of Negotiable Instruments Law (section 1)
Note: a valid instrument is not necessarily negotiable.
Case: Caltex vs. CA
- What determines the negotiable of a document is not the
agreement of parties, rather is the face itself
- The use of the term “bearer” makes the CTD negotiable
- However, in this case, the CTDs were merely a security for the
purchased products from Caltex. Thus, Caltex is not a holder in
due course and they should not have presented the check
Section 1. Form of negotiable instruments – an instrument to be negotiable
must conform to the following requirements:
a. It must be in writing and signed by the maker or drawer;
2 angel‘s notes
b. Must contain an unconditional promise or order to pay a sum
certain in money;
c. Must be payable on demand, or at a fixed or determinable
future time;
d. 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
Note: requisites a-d are necessary in order that a promissory note may be
negotiable; a-3 for bill of exchange
Commercial paper – refers to written promises or obligations that arise out
of commercial transactions; may either be negotiable or non-negotiable
IT MUST BE IN WRITING AND SIGNED MY THE MAKER OR DRAWER
A. It must be in writing and signed by the maker or drawer
- it must be reduced in tangible form
- anything that is in print or has been typed so long as it is movable
in nature
Note: A check is only payable on demand. You may issue a post-dated check
but you cannot deposit such until the date of maturity of the check
Case: Astro Electronics Corp, et. al vs. Phil Export & Foreign Loan Guarantee
Corp
- once you sign a negotiable instrument, you are bound by such
signature and thus you are obligated to pay
- Signing the check twice made him liable also in his personal
capacity
Note: A signature is prima facie evidence of a person’s intention to be bound
as either maker or drawer. However, if the signature is so placed upon the
instrument that it is not clear in what capacity the person intended to sign,
he is deemed an indorser and not a maker or a drawer
A SUM CERTAIN IN MONEY
B. Section 2. Certainty as to sum; what constitutes – The sum payable is a
sum certain within the meaning of this Act, although it is to be paid –
a. With interest; or
b. By stated installments; or
c. By stated installments, with a provision that upon default in
payment of any installment or of interest the whole shall
become due; or
d. With exchange, whether at a fixed rate or at the current rate; or
e. With costs of collection or an attorney’s fee, in case payment
shall not be made at maturity
- What is reflected in a negotiable instrument should be money and
not material things because a negotiable instrument is a
substitute for money
- It must be determinable and should be easily computed
Q: why must the NI be payable in money?
A: Because money is the one standard of value in actual business. Further, it
is to assure clarity and certainty in determining the value of the instrument
Q: How do you know that the requirement is met?
A: It is met when the holder can determine from the instrument itself the
amount he is entitled to receive at maturity
The amount to be paid must be stated plainly on the face of the instrument
or at least, may be ascertained upon its face by computation, independent of
any extrinsic evidence. Thus, a promissory note giving the maker the right to
ascertain the amount rightly payable thereunder is non-negotiable.
NEGOTIABLE INSTRUME NTSLAW
De Leon, Assigned Cases, Class Discussion
Sum to be paid with Interest
- Provision for the payment of interest is a mere incident
- If the instrument provides for the payment of interest without
stating the date from which interest is to run, it shall be computed
from the date of the instrument, and if the instrument s not
dated, from the issue thereof. (rate is 12%)
Note: A negotiable instrument with an usurious interest remains to be such
because the contract remains valid as to the principal
Sum to be paid by stated installments
- The interest of each installment and the due date of each
installment must be fixed in the instrument
- An acceleration clause does not make an instrument payable
upon contingency since the time of payment will surely come and
the exact value of the instrument can be ascertained
Acceleration and Extension Clauses
- Acceleration dependent on maker – negotiable; maker can avoid
it by paying the installments on the due date
- Acceleration dependent on holder – non-negotiable because the
time of payment becomes uncertain
- Extension clauses are the opposite of acceleration clauses
- Extension clause dependent on holder – negotiable; The holder is
free to postpone the time of payment even if no extension clause
appears
- Extension clause dependent on maker – non-negotiable because
the definite time requirement is not met
Sum to be paid with exchange
- Refers to instruments that are payable in foreign currency
- This does not impair negotiability because the current rate of
exchange at any given time may easily be ascertained by inquiry
from the banks dealing on exchange
Note: this provision applies to instrument drawn in one country and payable
in another. It is not applicable to an instrument both drawn and payable at
the same place
Section 5. Additionl provisions not affecting negotiability – An instrument
which contains an order or promise to do any act in addition to the
payment of money is not negotiable. But the negotiable character of an
instrument otherwise negotiable is not affected by a provision which:
a. Authorizes the sale of collateral securities in case the instrument
be not paid at maturity; or
b. Authorizes a confession of Judgment if the instrument be not
paid at maturity; or
c. Waives the benefit of any law intended for the advantage or
protection of the obligor; or
d. Gives the holder an election to require something to be done in
lieu of payment of money
But nothing in this section shall validate any provision or stipulation
otherwise illegal
- GR: non-negotiable if it contains a promise or order to do any act
in addition to the payment of money
- EXC: Section 5 (a-d)
Sale of Collateral Securities
- Does not destroy negotiability because such stipulation is only
performed after the date of maturity when the instrument is no
longer negotiable in the full commercial sense
- This adds to the marketability of the instrument
Confession of Judgment
- Enables the holder to obtain a judgment without the delay usually
incident to a law suit, as it eliminates the necessity of a trial
3 angel‘s notes
- Unless EXPRESSLY authorized by statue, they are void as against
public policy because they enlarge the field of fraud – the
promissory bargains away his right to a day in court
- Note however, the invalidity of the provision as to the confession
of judgment does NOT render the instrument non-negotiable
Waiver of Benefit granted by law
- Such does not destroy the negotiability of an instrument
- Notice of Dishonor: benefit granted to subsequent holders or
secondary liable parties
Election of holder to require some other act
- When an option to pay a sum certain in money or a particular
object belongs to the holder – negotiable
- If at the option of the maker – non-negotiable
- The important point is that the payment should be certain to the
HOLDER (so that subsequent holders will know the value they will
receive)
UNCONDITIONAL PROMISE OR ORDER TO PAY
B. Section 3. When Promise is unconditional – An unqualified order or prose
to pay is unconditional within the meaning of this Ac, 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
Q: why should the instrument be unconditional?
A: Because NIs are intended to flow easily through the commercial worked
Note: a bare admission or acknowledgment of indebtedness ALONE is NOT a
negotiable instrument
In case of bill of exchange, there must be an unconditional ORDER to pay by
one party to another; otherwise, it is non-negotiable.
Q: When is a promise or order to pay considered unconditional?
A:
a. It must not be subject to any condition (future and undetermined)
or contingency
b. If funds indicated is not the direct source of payment but only the
source of reimbursement which is an act subsequent to the
payment (Section 3a)
c. If there is only a mere recital of the consideration for which the
instrument was issued or mere reference to a separate agreement
out of which the instrument has arisen (Section 3b)
However, if the obligation to pay is burdened with the terms and
conditions of another contract, the instrument is not negotiable.
Note: the test of negotiability in every case is said to be whether or not the
instrument carries the GENREAL PERSONAL CREDIT of the maker or drawer.
Case: Abubakar vs. Auditor General; Metrobank vs. CA
- Treasury warrants are non-negotiable instruments since the funds
from which payment is to be made is from a specific or particular
fund.
PAYABLE ON DEMAND
C. Section 7.When payable on Demand – an instrument is payable on
demand –
a. Where it is expressed to be payable on demand, or at sight, or on
presentation; or
NEGOTIABLE INSTRUME NTSLAW
De Leon, Assigned Cases, Class Discussion
 b. In which no time for payment is expressed.
Where an instrument is issued, accepted or indorsed when overdue, it
is, as regards the person so issuing, accepting, or indorsing it, payable
on demand.
Note: the first paragraph applies to immediate and subsequent parties;
second paragraph applies only to immediate parties
Fixed date – instrument shows a maturity date
Time Instrument – when instrument is payable on a maturity date or a
definite time
Note: the term “payable at sight” applies only to bill of exchange
An overdue instrument is necessarily a demand paper. A holder has an
immediate right of payment for the money promised or ordered to be paid
A note payable at the MAKER’S CONVENIENCE is payable. Likewise, an
instrument “payable…after date” is payable on demand.
REMEMBER: Drawee needs to ACCEPT before he is bound to pay the amount.
(Payment is made only after acceptance. If he dishonors, holder cannot ask
for payment)
Case: Buencamino vs. Hernandez
- Issue: WON the negotiable land certificates was payable on
demand or not
- SC ruling: section 7 defines what is payable on demand. In the
present case, the 5 year prohibition was the cause for its failure to
comply with the requisites provided for by law to be treated as
payable on demand.
DETERMINABLE FUTURE TIME
C. Section 4. Determinable Future time; what constitutes – An instrument is
payable at a determinable future time, within the meaning of this Act,
which is expressed to be payable –
a. At a fixed period after date or sight; or
b. On or before a fixed determinable future time specified therein;
or
c. On or at a 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.
Note: a note containing a provision that is may be renewed at maturity is
non-negotiable because there is no unconditional promise to pay at
maturity
- When time of payment is certain: the payment will certainly
become due and payable one time or other, though it may be
uncertain when that time will come
Note: an instrument payable “at the earliest possible time after date” is NOT
payable at a definite time
a. At a fixed period after date or sight
 when said to mature after date: refer to date of ISSUANCE
 when said to mature after sight: refer to the date of acceptance
by the drawee (applicable only to bill of exchange)
Q: can you use “after sight” in a promissory note?
A: no because the maker is the one who will accept the note (he is the one
promising)
b. On or before a fixed determinable future time specified therein
4 angel‘s notes
 ex. Pay P or bearer on or before 12/20/10
- Holder cannot demand fixed period or to be paid before the
maturity date because in such case the instrument will no long
be certain. He can only demand payment on the last day
- Maker however has the option when to extinguish his obligations
Note: the instrument is non-negotiable where the holder’s right to exercise
the option depends upon the happening of a specified event or contingency
over which he has no control.
c. On or at a fixed period after the occurrence of a specified event, which
is certain to happen, though the time of happening be uncertain
- Determinable future time means a time that can be determined
with certainty after the execution of the instrument
Thus, a bill or note payable several days before the occurrence of
the specified event is not negotiable, since the date of maturity of
the instrument can only be ascertained after it has become
overdue.
Note: an instrument containing a promise to pay “when able” or “as soon as I
can” is NOT negotiable. Why? Because of the condition and want of a fixed
time for payment.
WORDS OF NEGOTIABILITY
D. Section 8. When payable to order – the instrument is payable to order
where it is dran payable to the order of a specified person or to him or
his order. It may be drawn payable to the order of:
a. A payee who is not maker, drawer, or drawee; or
b. The drawer or maker; or
c. The drawee; or
d. Two or more payees jointly; or
e. One or more several payees; or
f. The holder of an office for the time being.
Where the instrument is payable to order the payee must be named or
otherwise indicated therein with reasonable certainty
Q: when is an instrument payable to order?
A: where it is drawn payable: (1) to the order of a SPECIFIED PERSON or (2) to
him or his order.
Note: in an order instrument, a SPECIFIED person must always be named
therein either before or after the word “order”.
Q: who is your payee?
A: a-f enumeration of section 8
a. A payee who is not maker, drawer, or drawee
 Person other than your drawer
b. The drawer or maker
 Pay to the order of “myself” (bill of exchange, checks)
 Promise to pay “myself”/ order… (promissory note)
 Note: the instrument only becomes complete upon the passing on
of instrument
c. The drawee
 Pay to the order of yourself
d; e. Two or more payees jointly; One or more several payees
 “and” – for joint obligation; “or” for solidary obligation
f. The holder of an office for the time being
 Ex. City treasurer (you pay the office, not the person)
D. Section 9. When payable to Bearer – the instrument is payable to bearer:
a. When it is expressed to be so payable; or
b. When it is payable to a person named therein or bearer; or
NEGOTIABLE INSTRUME NTSLAW
De Leon, Assigned Cases, Class Discussion
 c. When it is payable to the order of a fictitious or non-existing
person, and such fact was known to the person making it so
payable; or
d. When the name of the payee does not purport to be the name of
any person; or
e. When the only or last indorsement is an indorsement in blank
Bearer – means the person in possession of a bill or note which is payable to
bearer.
Q: how is negotiability perfected for bearer and order instruments?
A: Negotiability of a bearer instrument is perfected by mere delivery even
without indorsement and payment to any person in possession thereof. On
the other hand, negotiability of an order instrument is perfected by
indorsement and delivery of the instrument.
Note: an instrument that fails to qualify as an order instrument is
nonetheless negotiable if it is payable to bearer.
An note payable “to the order of bearer” was held payable to order and NOT
to bearer.
An instrument payable to “bearer or P” is not negotiable – as the term bearer
is said to be a description of P thus the instrument is payable to a specific
person.
c. Fictitious Person
 Q: why does it become payable to bearer?
A: because it is impossible for a fictitious person to indorse the
document. One should remember that an in an order instrument,
you need to INDORSE and DELIVER the instrument. Indorsing
would mean signing at the back of the instrument. (How can a
fictitious person sign the document?)
Note: a fictitious person is meant to be one who, though named or specified
as payee in an instrument, has no right to it because the maker or drawer so
intended and it matters not, therefore, whether the name of the payee used
by him be that one living or dead,or one who never existed.
d. Not the name of any person
 Ex. Pay to the order of “cash” – even if the word “order” is there,
it is still considered a bearer instrument
e. Indorsement in blank
 Special Indorsement: if name of transferee is specially named
 Blank Indorsement: you only see the signature of the transferor.
From this time on, it need not be indorsed
Note: once an instrument is converted into a bearer instrument, it cannot be
reverted back as an order instrument. If it was originally a bearer instrument,
it remains as is regardless of any indoresement done.
Case: Far East Bank vs. Querimit
- Since the promise of the bank was to pay to the HOLDER of the
certificate, they were considered negligent in delivering payment
to the husband who was not in possession of the certificate
- Certificates of deposit marked payable to bearer needs to be
surrendered before it can be honored
Case: PNB vs. Rodriguez
- The court expanded the meaning of a FICTITIOUS person
o An actual, existing, and living payee may also be
“fictitious” if the maker of the check did not intend for
the payee to in fact receive the proceeds of the check
Case: GSIS vs. CA;
- An instrument which is not payable to order or to bearer, but
rather to a specific person is NOT a negotiable document
5 angel‘s notes
Case: Consolidated vs. IFC Leasing
- Absence of the words of negotiability (to order or to bearer) are
proofs that an instrument is non-negotiable
- The transfer of such instrument to respondent therefore makes
them a mere assignee who merely steps in the shoes of the
Industrial corporation
OTHER TERMS DENOTING NEGOTIABILITY
Section 10. Terms, when sufficient – The instrument need not follow the
language of this Act, but any terms are sufficient which clearly indicate an
intention to conform to the requirements thereof.
- it is not required to use the exact words of the law
- The substance of the transaction rather than its form is the
criterion of negotiability
- As long as the clear intention of the parties to make the
instrument negotiable can be determined, the law will give it
force and effect
- An instrument may be negotiable though written in a foreign
language
- Mere defect in language or grammatical error does not destroy
negotiability
DATE
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.
- If the instrument bears a date, it is presumed that said date is the
date when it was made or drawn
- The date is the TRUE date of the making, drawing, acceptance or
indorsement
Note: He who claims that some other date is the true date has the burden to
establish such claim
Q: is the date necessary to make the instrument negotiable?
A: GR: a date is NOT essential to make an instrument negotiable. We note
that Section 1 does not require the date
EXC: there are cases when the date is necessary to determine the maturity of
the instrument:
a. Where instrument is payable at a fixed period after date
b. Where instrument is payable at a fixed period after sight or
presentment
c. When there is a stipulation of interest
Q: for a and b, why is the date necessary?
A: to determine due date or date of maturity
Q: for c, why is the date necessary?
A: to determine when the interest will start to run. To know how much you
will pay
Remember: if you don’t have the issuance or acceptance date, you cannot
determine the maturity date
Note: the date of issue of the promissory note or the date of the last
negotiation of the bill of exchange is, therefore, essential for the purpose of
determining whether a party has acted within a reasonable time but not to
make the instrument negotiable.
Sec. 12. Ante-dated and post-dated. - The instrument is not invalid for the
reason only that it is ante-dated or post-dated, provided 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.
NEGOTIABLE INSTRUME NTSLAW
De Leon, Assigned Cases, Class Discussion
 Ante-dated – contains a date earlier than the true date of issuance
 Post-dated – contains a date later than the true date of issuance
Q: when you ante/post date an instrument, does it make such instrument
illegal?
A: GR is NO. Exception is if it will be used for an illicit, illegal or fraudulent
purpose. It may be negotiated before or after the date given as long as it is
not negotiated after its maturity.
Example: Illegal ante-dating is that done to conceal the charge of usurious
interest. Illegal post-dating is to issue a post-dated check in payment of an
obligation because of insufficiency of funds without bona fide intention to
cover the amount of the check.
Q: when does an instrument takes effect?
A: During the date of delivery - the date when the person to whom the
instrument so dated is delivered acquires title or ownership over it.
Case: San Miguel vs. Puzon
- Transfer of ownership of ante/post- dated checks happen upon
delivery of the check with INTENT to give effect to the instrument
- Note the importance of INTENT to give effect to the instrument is
NECESSARY
- In this case, since the checks were delivered not as payment but
as mere security, then the intent to give effect is absent, thus
there can be no transfer of ownership
Case: Firestone Tire & Rubber Vo. Vs. Ines Chavez
- Ante/post dated check are valid as long as they are not used for
illicit purposes
- If payee agrees to receive post dated checks with knowledge that
there is no sufficient funds yet, then drawer cannot be considered
to be in bad faith
Sec. 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 instrument 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.
- Speaks of 2 instances when date may be inserted:
o Where an instrument is payable at a fixed period after
date but is issued undated
o Where an instrument is payable at a fixed period after
sight but the acceptance is undated
Q: what are the instances when you CANNOT insert a date?
A: (in these instances, you have no authority to insert the date)
a. If instrument is payable on DEMAND (why? It is demandable from
the time of delivery)
b. If note has a fixed period
c. Undated bill of exchange payable at a fixed period after sight (as long
as acceptance date is there)
Q: Who may insert the date?
A: payee or any other subsequent holder (thus, it continue to be negotiable)
Q: what happens if in the course of negotiation, holder placed a false date?
Can he compel payment?
A: No, because it is tantamount to bad faith. Insertion of a wrong date by one
having knowledge of the true date of issue or acceptance will avoid the
instrument as to him or any one claiming under him but not as to a
subsequent holder in due course who may enforce the same notwithstanding
the improper date.
6 angel‘s notes
Note: if you are no longer a holder in due course, you can no longer wait for
the true maturity date
OMISSIONS NOT AFFECTING NEGOTIABILITY
Sec. 6. Omissions; seal; particular money. - The validity and negotiable
character of an instrument are not affected by the fact that:
a. It is not dated; or
b. Does not specify the value given, or that any value had been
given therefor; or
c. Does not specify the place where it is drawn or the place where it
is payable; or
d. Bears a seal; or
e. Designates a particular kind of current money in which payment
is to be made.
But nothing in this section shall alter or repeal any statute requiring in
certain cases the nature of the consideration to be stated in the
instrument.
- Section 6 merely expands section 1
- If there is a date, but no such date exists, the law will deem the
nearest date of the month the date intended
- It is not even necessary to state that value has been received for
the instrument because consideration is presumed
- A note that does not specify the place of payment is presumed to
be payable at the place of residence of the maker
- The law does not require that payment should be made in legal
tender. It includes any particular kind of current money or foreign
money which has fixed value in relation to our money
LIABILITY OF PERSON WHOSE SIGNATURES APPEAR ON THE INSTRUMENT
Sec. 18. Liability of person signing in trade or assumed name. - No person is
liable on the instrument whose signature does not appear thereon, except
as herein otherwise expressly provided. But one who signs in a trade or
assumed name will be liable to the same extent as if he had signed in his
own name.
- One who signs in a trade name or assumed name is liable as if he
signed his own name
GR: only person whose signatures appear on an instrument are liable
thereon
EXC:
a. Where a person signs in a trade or assumed name (sec. 18 par 2)
b. The principal is liable if a duly authorized agent signs on his own
behalf (sec. 19)
c. In case of forger (sec. 23), the forger is liable even if his signature
does not appear on the instrument
d. Where the acceptor makes his acceptance of a bill on a separate
paper (sec. 134)
e. Where a person makes a written promise to accept a bill before it is
drawn (sec. 135)
Q: what does an issuer have to do in order to be bound by the instrument?
A: he should sign the instrument
Q: if issuer does not use his customary signature, can he be bound
A: yes. By using his trade name or assumed name
Q: can he be bound even if he was not the one who signed?
A: yes, if an gens signs in his behalf of principal
Q: How can an agent be bound by the instrument?
A: Refer to section 20
NEGOTIABLE INSTRUME NTSLAW
De Leon, Assigned Cases, Class Discussion
Sec. 19. Signature by agent; authority; how shown. - The signature of any
party may be made by a duly authorized agent. No particular form of
appointment is necessary for this purpose; and the authority of the agent
may be established as in other cases of agency.
Q: should authorization of an agent be in a particular form?
A: No, there is no particular form of appointment needed. It may be given
orally or in writing subject to the provisions of the Statute of Frauds.
Note: The purpose of a written power of attorney is not to define the
authority of the agent, as between himself and the principal, but to evidence
the authority of the agent to third parties dealing with the agent.
Sec. 20. Liability of person signing as agent, and so forth. - Where the
instrument contains or a person adds to his signature words indicating that
he signs for or on behalf of a principal or in a representative capacity, he is
not liable on the instrument if he was duly authorized; but the mere
addition of words describing him as an agent, or as filling a representative
character, without disclosing his principal, does not exempt him from
personal liability.
- In order that an agent who signs a negotiable instrument may
escape personal liability, the following are the requisites:
o He is duly authorized
o He adds words to his signature indicating that he signs
as an agent
o He discloses his principal
Note: the mere addition of descriptive words without disclosing the principal
will not relieve the signer from personal liability
Note however: the rule is NOT absolute. As between immediate parties,
extrinsic evidence may be admitted to show the real character of the
transaction. (ex. Payee knew that the signer is a mere agent)
Sec 21. Signature by procuration; effect of. – A signature by “procuration”
operates as notice that the agent has but a limited authority to sign, and
the principal is bound only in case the agent in so signing acted within the
actual limits of his authority
Procuration
- The act by which a principal gives power to another to act in his
place as he could himself
- It gives a warning that the agent has but a limited authority (it is
necessary therefore to inquire into the extent of the agent’s
authority)
Effects of Signature by Procuration
A. Where agent Exceeds his authority
- The principal is NOT bound if the agent has exceeded the actual
limits of his authority
- Ex. You are authorized to issue a negotiable instrument worth
P5,000. However agent will buy products worth P10, 000 and
issues an instrument to pay for it
B. Where agent acted with Abuse of authority given
- Abuse is not a defense against a bona fide holder for value
- Ex. Agent is authorized to sign checks for the principal. But in the
use of such authority, you sign check to pay for your needs
Sec. 22. Effect of indorsement by infant or corporation.- The indorsement or
assignment of the instrument by a corporation or by an infant passes the
property therein, notwithstanding that from want of capacity, the
corporation or infant may incur no liability thereon.
Effect of Indorsement by Infant (below 18 yrs. Old)
7 angel‘s notes
M P or order P50T to be payable on 12/20/10 A
(minor) B C
Q: Can C collect from M? Is M’s refusal to pay justified?
A: C can collect from M. Section 22 provides that even if a negotiable
instrument is passed to a minor, the minor can effectively transfer such valid
title. (a minor is not incapacitated to transfer certain rights)
Indorsement of a minor is not void and that his capacity is NOT a defense in
favor of PRIOR parties.
GR: contracts entered into by a minor are voidable at his instance or at the
instance of his guardian
IMPORTANT: Minority is not a personal defense which may be set up by
parties other than the minor; but it is a real defense available to the minor.
Hence, he may also disaffirm and recover the instrument from a holder in
due course.
Q: when can a minor be held bound by his signature in an instrument?
A: when he is guilty of actual fraud committed by specifically stating that he
is of age, when in fact, he is not.
Note: incapacitated person extends to insane or demented person, and deaf-
mutes who do not know how to read and right.
These people are not bound to restore anything he has received by virtue of
his contract, except to the extent to which he has been benefited thereby
Effect of Indorsement by a Corporation
- Note that indorsement by a corporation refers only to ULTRA
VIRES ACTS (unauthorized acts)
Q: when is an act unauthorized?
A: when there is no board resolution allowing such act
Example: if the president of the company will endorse and instrument in
behalf of the corporation without the necessary board resolution, then the
corporation can defend itself as not liable. However, the one who signed
such instrument will be liable. (Note: the defense is only for the Corporation)
Case: Astro Electronics Corp, vs. Phil Export & Foreign Loan Guarantee Corp
- once you sign a negotiable instrument, you are bound by such
signature and thus you are obligated to pay
- Signing the check twice made him liable also in his personal
capacity
Case: Republic Planters Bank vs. CA
- In this case, the instrument was a promissory note
- Failure to comply with the requirement of stating that one is just
a mere agent, and failing to disclose the principal – the person is
liable and is considered as a co-author
Case: PBCom vs. Aruego
- In this case, the instrument was a draft (Bill of exchange)
o Drawer: party secondarily liable
o Drawee: becomes primarily liable when he accepts the
instrument. No acceptance, no liability
- Failure to disclose the principal makes the signatory liable
DEFECTICE NEGOTIABLE INSTRUMENTS
Steps in the issuance of Negotiable Instruments:
1. The mechanical act of writing the instrument completely and in
accordance with the requirements of Section 1
NEGOTIABLE INSTRUME NTSLAW
De Leon, Assigned Cases, Class Discussion
 2. The delivery of the complete instrument by the maker or the
drawer to the payee or holder with the intention of giving effect
to it.
Q: What is the consequence if either one of the two steps or requirement is
lacking?
A: Instrument becomes defective. The defects are discussed in section 14, 15
and 16.
Sec 14 – applies only to an incomplete instrument which has been delivered
by the maker or the drawer to the payee or holder
Sec 15 – applies to an incomplete instrument and undelivered
Sec 16 – applies to a complete instrument but undelivered
Sec. 14. Blanks; when may be filled. - Where the instrument is WANTING IN
ANY MATERIAL PARTICULAR, 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 paper 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 instrument 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 such 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 authority given and within a reasonable
time.
2 classes of instruments
1. Those in which obvious blanks are left at the time they are made
or indorsed; manifestly indicates that the instruments are
incomplete until such blanks shall be filled up
o In this case, one who signs or indorses is LIABLE to
BONA FIDE holders thereon on the doctrine of IMPLIED
AUTHORITY
2. Those which are apparently complete, containing blanks only
because the written matter does not so fully occupy the entire
paper
o The liability for the amount of the instrument which
has been increased by filling up unoccupied spaces
therein is placed upon the doctrine of NEGLIGENCE
Rules where Instrument Incomplete but Delivered
1. Authority to fill up the blanks – holder or the person in possession
has prima facie authority to complete an incomplete instrument
by filling up the blanks therein
- Material Particular: any particular proper to be
inserted in a negotiable instrument to make it
complete
- Note: the authority to complete is not an authority to
alter
2. Authority to put any amount – a signature on a blank paper
delivered in order that it may be converted into a negotiable
instrument operates as a prima facie authority to fill it up as such
for any amount
3. Right against party prior to completion – The instrument may be
enforced only against a party prior to completion if filled up
strictly in accordance with the authority given and within a
reasonable time
- Note that the person who signed his name has the
burden to rebut the presumption of agency by
contrary proof of want of authority, or proving that the
authority granted was exceeded
8 angel‘s notes
- “Reasonable time” for filling up the Instrument is to be
reckoned from the time of the issuance of the
instrument
4. Right of Holder in Due Course – The defense that the instrument
had not been filled up in accordance with the authority given and
within a reasonable time is NOT available as against a holder in
due course
- Section 14 merely raises a personal defense
- The rule is founded upon the principle that where one
of two persons must suffer by the bad faith of another,
the loss must fall upon the one who first reposed
confidence and made it possible for the loss to occur
(Reason of Equity)
M P (failed to fill amount of 20,000) A (filled
the amount of 200,000) B C (HIDC)
Q: If C goes after M for 200,000, will M be liable?
A: Yes. The wrong amount becomes correct because C is a HIDC. If C is not a
HIDC, M may refuse to pay P200,000. M goes after A for reimbursement.
Q: But is M still liable to pay the P20,000 if C is NHIDC?
A: No, C cannot collect anything. The implication of the law is that when one
or both requisites are absent, the holder NOT in due course cannot recover.
But C can go after A or B because of the warranty under Section 65 and 66. P
cannot be called upon to pay because his standing is the same with M
(innocent parties)
Summary Rule for Section 14
 If NOT STRICTLY filled up
o HIDC – parties prior to the completion are liable
o NHIDC – parties prior to completion are NOT liable
 If STRICTLY filled up
o HIDC and NHIDC – all parties are liable
Sec. 15. Incomplete instrument not delivered. - Where an incomplete
instrument has not been delivered, it will not, if completed and negotiated
without authority, be a valid contract in the hands of any holder, as against
any person whose signature was placed thereon before delivery.
Rules where Instrument Incomplete and Undelivered
1. Defense even against a holder in due course - The fact that an
incomplete instrument, completed without authority has not
been delivered is a defense even against a holder in due course
- REAL DEFENSE exists
- However, there is a prima facie presumption of
delivery, which the maker must rebut by proof to the
contrary (Under certain circumstances, negligence on
the part of maker may render him liable to a holder in
due course
2. Defense available to parties prior to delivery – The invalidity of
the instrument is only with reference to the parties whose
signatures appear on the instrument BEFORE and not after
delivery (basis: warranty of indorsement)
M (left instrument in his drawer) P (stole and printed his
name as payee) A B C (HIDC)
Q: Can M refuse to pay C?
A: Yes because he has a REAL defense considering that the instrument was
incomplete and undelivered (regardless of HIDC or NHIDC)
Case: Bank of America vs. Philippine Racing Club
- What is applicable here is Section 14 (incomplete and delivered)
- Bank is considered as the last holder (NHIDC)
NEGOTIABLE INSTRUME NTSLAW
De Leon, Assigned Cases, Class Discussion
 - Issue is whether the drawer should bear the loss?
o As a general Rule, NO because it is NOT his order.
However, the SC apportioned the loss to 60% (bank)
40% (drawer) because of negligence
Case: Republic Planters Bank vs. CA
- In this case, the instrument was a promissory note
- Failure to comply with the requirement of stating that one is just
a mere agent, and failing to disclose the principal – the person is
liable and is considered as a co-author
EFFECT OF DELIVERY OF COMPLETE INSTRUMENT
Sec. 16. Delivery; when effectual; when presumed. - Every contract on a
negotiable instrument is incomplete and revocable until delivery of the
instrument 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 liable 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
presumed until the contrary is proved.
Note: every contract on negotiable instrument even if it is completely written
is INCOMPLETE and REVOCABLE until its delivery for the purpose of giving it
effect
Delivery – there should be intent to transfer title thereto
Issue – defined as the first delivery of the instrument, complete in form, to a
person who takes it as holder
Rule
- If a complete instrument is found in the possession of an
immediate party or a remote party other than a holder in due
course, there is a prima facie presumption of delivery but SUBJECT
to REBUTTAL
Immediate parties – those having or being held to know of the
conditions or limitations placed upon the delivery of the instrument
(contemplates on PRIVITY not proximity)
Remote parties – parties who are not in direct contractual relation to
each other
- If delivery was made or authorized, it may be shown to have been
conditional, or for a special purpose only, and not for the purpose
of transferring the property (title) to the instrument
- If a complete instrument is in the hands of a holder in due course,
a valid delivery thereof by all parties prior to him is CONCLUSIVELY
- PRESUMEED. (it admits of no evidence to the contrary)
M (left instrument in his drawer) P (stole the instrument)
A B C (HIDC)
Q: Is M liable?
A: Yes because there is a presumption that it was validly delivered
Q: why is it presumed?
A: Because this is the principle of MANIFEST JUSTICE – when one of two
persons must suffer by the acts of a third, he who has enabled such third
person to occasion the loss must bear it; party who is made to suffer the loss
9 angel‘s notes
has reposed confidence in the third person whose acts have occasioned the
loss.
Further the completion of the document is also a manifestation that the
document is intended to be delivered. There is nothing left to do but to
deliver the instrument. (if the maker intended not to be bound, why would
he make the instrument)
Q: is such presumption rebuttable?
A: No. The presumption is considered CONCLUSIVE.
Q: What if C is NHIDC, is M liable?
A: M is NOT liable IF PROVED that he really did not deliver the instrument.
Presumption is NO longer conclusive, rather is only a Rebuttable
presumption
Case: De la Victoria vs. Burgos
- There was still NO delivery of the salary as it was still in the hands
of the government
- Issue was WON the garnishment of the salary was proper?
o NO because the money was still considered public
funds
o Delivery would mean that it is physically delivered to
the payee
Case: Lim vs.CA
- Under the NIL, delivery is the final act to enforce the obligation
(Sec. 60), and that it is made to the RIGHTFUL party or INTENDED
payee
- In this case, there was no delivery
- The delivery to a collector is not what is intended in the NIL. A
collector is not the intended payee
Case: DBP vs. Wei
- DBP has no cause of action against Wei because the check was
not delivered to them (thus there can be no transfer of
ownership)
- Since there was no delivery to DBP the issuer can still revoke the
Negotiable Instrument
- But note that the obligation of payment of Wei to DBP is not yet
extinguished
FORGERY AND MATERIAL ALTERATION
Forgery – the counterfeit-making or fraudulent alteration of a writing, with
intent thereby to defraud
In forgery, the customary signature need not be followed as long as they
make it appear that another person is the author of the instrument
Remember: there are different effects if forgery is made in a promissory note
or a bill of exchange.
Sec. 23. Forged signature; effect of. - When a signature is forged or made
without the authority of the person whose signature it purports to be, it is
wholly inoperative, and no right to retain the instrument, or to give a
discharge therefor, or to enforce payment thereof against any party
thereto, can be acquired through or under such signature, unless the party
against whom it is sought to enforce such right is precluded from setting up
the forgery or want of authority.
Application of Section 23 (Two cases)
1. Where the signature on the instrument is affixed by one who does
not claim to act as an agent and who has no authority to bind the
person whose signature he has forged
2. Where the signature is affixed by one who purports to be an
agent but has no authority to bind the alleged principal
NEGOTIABLE INSTRUME NTSLAW
De Leon, Assigned Cases, Class Discussion
Effect of Forged Signature - If bearer instrument is indorsed by P, A and B, C can collect from
5. The signature is whole inoperative and so no right can be acquired everybody because they can be traced (only those who indorsed
against the person whose signature was forged are made liable because they can be traced)
 Forgery therefore, is a REAL or ABSOLUTE defense even against a
holder in due course 2. Forgery of Indorser’s Signature
 Rule: in OI – determine parties prior and subsequent to the
Cases of Forgery in General forgery
1. Forgery of Promissory notes  Rule: in BI – determine if holder is HIDC or NHIDC in
a. Forgery of an indorsement on the note determining liability of maker whose signature was forged
b. Forgery of the maker’s signature
2. Forgery of Bills of Exchange
a. Forgery of an indrosement on the bill M P A B C
b. Forgery of the drawer’s signature

General Rule ORDER INSTRUMENT – indorsement + delivery

- A forged indorsement prevents any subsequent party form
acquiring any right as against any party whose name appears - C cannot collect from M and P because they are parties prior to
PRIOR to the forgery the forgery and can’t be held responsible
- C cannot collect from A because the note is wholly inoperative
Exceptions to the General Rule against him
1. If the party against whom it is sought to enforce such right is - C can collect from B because indorsement is genuine as against
precluded from setting up the forgery or want of authority (Sec. him (warranty under Section 66)
23) - B can only collect from X, the forger
2. Where the forged signature is not necessary to the holder’s title in
which case the forgery may be disregarded (Sec. 48) Q: why can’t C recover from M and P?
A: because the rights of the holder are cut-off against parties prior to
Persons Precluded from setting up the Defense of Forgery (2 general classes) the forgery
1. Those who by their acts, silence, or negligence, are stopped from
setting up such defense BEARER INSTRUMENT – delivery
2. Those who warrant or admit the genuineness of the signatures in
question - If BI, it does NOT matter if you are a prior or subsequent party to
a. Indorsers forgery
b. Acceptors - C can collect from M because forgery of indorsement is irrelevant
c. Persons negotiating by delivery - If M does not pay, B, P, X is liable if there is a special indorsement
- If no special indorsement and M does not pay, C can only collect
“he who is silent when conscience requires him to speak shall be debarred from B (warranty against section 65)
from speaking when conscience requires him to be silent” - C cannot immediately collect from A
o If C is HIDC, A is liable because there is a presumption
Forgery on Promissory Notes of delivery (conclusive presumption)
o If C is NHIDC, A is not liable because he has personal
1. Forgery of Maker’s Signature defense that there was no delivery (rebuttable
- Rule: If maker’s signature is forged, he is DEFINITELY NOT BOUND presumption)
regardless of it being an ORDER instrument or BEARER instrument
Forgery on Bill of Exchange
M (sig. was forged) P A B C
1. Forgery of Maker’s Signature

ORDER INSTRUMENT – indorsement + delivery

D (drawer forged) P (payee) A B
CB (collecting bank) DB (drawee bank)
- C cannot collect from M because the latter’s signature is wholly
inoperative ORDER INSTRUMENT – indorsement + delivery
- C can collect from P, A, B because of the warranty (genuineness of
instrument; section 66) - DB should reimburse D beause the latter’s signature is wholly
- X, forger, is ultimately liable inoperative
- If DB pays CB, it cannot collect or recover from CB because
indorsement of the latter does NOT guarantee the signature of D.
Q: why can C collect from P, A, B? DB is negligent in not identifying D’s signature which is its client
A: You can trace them easily because of the indorsements - DB can go after forger
- DB can go after B/A/P
BEARER INSTRUMENT – delivery - If DB does not pay , CB can go after B/A/P/ because they are
liable due to warranty of genuineness
- C cannot collect from M because the latter’s signature is wholly - If DB does not accept, he is not made a party to the transaction
inoperative
- C can only collect from B because he doesn’t know P or A
(warranty in bearer instrument extends to the immediate
transfery only)

10 angel‘s notes
NEGOTIABLE INSTRUME NTSLAW
De Leon, Assigned Cases, Class Discussion
BEARER INSTRUMENT – delivery - Metrobank as last indorser is still liable for accepting the check
despite the fact that it was cross-checked (payable to payee’s
- If DB pays, he cannot recover from D. He should actually recredit account only) 40% liability
D’s account
- DB cannot go after CB because he is negligent for not discovering BPI vs. CA
the forgery  Bill of Exchange (Manager’s Check)
- if DB does not pay, CB can go after B (warranty under sec. 65)  Forgery of Indorser’s Signature

2. Forgery of Indorser’s Signature BPI(Dr/De) ”Eligia Fernando” CBC De

D P A B CB DB - BPI should still pay Eligia as the endorsement is wholly inoperative

ORDER INSTRUMENT – indorsement + delivery
If DB pays…
- DB should re-credit D’s account. Parties Prior to endorsement
cannot be made liable
- DB can recover from CB because when the latter made the check
go through clearing, it guaranteed that all prior indorsements
were genuine
- CB can go against B ( warranty under Section 66)
- CB cannot go against A because the latte’s signature is wholly
inoperative
against her
- CBC is liable to reimburse BPI for what it paid to Eligia as
collecting bank or last endorser generally suffers the loss because
it has the duty to ascertain the genuineness of all prior
endorsement (plus negligent for closing their eyes to the
suspicious circumstance of huge over the counter withdrawal);
40% liability
- BPI is more liable for failure to ascertain their client’s signature
(they did not ask for the promissory note); 60%liability
Metropolitan Waterworks (MWSS) vs. CA
 Bill of Exchange
 Forgery of Drawer’s Signature

If DB does not pay… MWSS(Dr) PCIB/PBC (Dizon, Sison, Mendoza)

- CB cannot collect from D or P because they are prior parties to
the forgery
- CB cannot collect from A because signature is wholly inoperative
- CB can go against B (warranty)
- DB is not obliged to know the signature of the indorser
Note: DB must be free from negligence to collect from CB (or else, they
may share liability)
CB’s remedy is to collect from the forger
PNB(De)
- GR: drawee bank should have been liable for not ascertaining the
genuineness of MWSS’ signature
- EXC: MWSS is precluded from setting up the defense of forgery
for they are negligent in issuing own personalized checks rather
than PNB checks. Further, even the officers of MWSS cannot
determine which of the signatures presented in court were forged
and which are not (forgery cannot be presumed)

BEARER INSTRUMENT – delivery PNB vs. CA

 Bill of Exchange
D P A B C DB  Forgery of Drawer’s Signature

GSIS Pulido Go LIm PCIP PNB

- If DB pays C, it should re-credit Ds account as indorsement is not
necessary
- If DB does NOT pay, C can collect from B only. But if there are - GR: Drawee bank is liable
special indorsements, C can collect from P and B. - Forgery of drawer’s signature does not automatically equate to
- A’s liability will depend if C is HIDC or NHIDC forgery of indorser’s signature
o If HIDC: A pays - PCIB’s indorsement and guaranty is only to the genuineness or
o If NHIDC: A does not pay authenticity of indorser’s signature and NOT that of drawer’s
signature
Cases - PNB is liable because it did not return the check to PCIB indicating
that it did not find anything wrong with the check
Allied Banking Corporation vs. Lim Sio Wan
 Bill of Exchange (Manager’s Check) San Carlos Mining vs. BPI
 Forgery of Indorser’s Signature  Bill of Exchange
 Forgery of Indorser’s Signature
Allied Bank(Dr/De) ”Lim” Producer’s Bank
FCC Metrobank De China Bank (manager’s check; Dr/De) San Carlos Mining or
Order (forged Baldwin’s indorsement) BPI De
- Allied Bank is still liable to pay Lim Sio because failure to pay to - Deposits in banks are not bailments
the right person does NOT extinguish your obligation - BPI cannot go after San Carlos Mining as the forged signature
- Allied Bank is negligent for issuing the manager’s check and therein made the transaction wholly inoperative against them
transmitting it to Santos without the authorization letter; 60% - BPI is liable for honoring the checks (guaranty of indorsement
liability under Section 66)

11 angel‘s notes
NEGOTIABLE INSTRUME NTSLAW
De Leon, Assigned Cases, Class Discussion
Gempesaw vs. CA
 Bill of Exchange Bureau of Treasury Martin Lorenzo (forged signature)
 Forgery of Payee’s Indorsement Ramon Lorenzo Adelaida Dominguez Mauricia
 Crossed-checks Ebrada (HIDC) Rep. Bank (Db)
Gempesaw Suppliers (forged signature by Galang)
PBCom in Romeo’s Account (through help of Boon)
- Bureau of Treasury asked republic bank to refund them
Philippine Bank of Commerce - Bank refunded and demanded Ebrada to pay
- It is only the negotiation base on the forged or unauthorized
- Gempesaw knew of the fraud only after 2 years signature which is inoperative. Thus, negotiation from Adelaida to
- GR: drawee bank who has paid a check on which an indorsement Mauricia is valid
has been forged cannot charge the drawers account for the said - Drawee bank can recover from the one who encashed the check
check because the last indorser warrants to the drawee that signature of
- EXC: Drawer is guilty of such negligence which causes the bank to the payee and previous indorseres are genuine, warranty not
honor such check (it failed to discover the discrepancies; extending only to holder in due course
discovered only after 2 years) - Collecting Bank has a recourse to the previous endorser
- However there was still negligence on the part of the Bank (they
failed to discover the fraudulent schemes of the accountant; Associated Bank vs. CA
Article 172: 50-50 liability)  Forged Indorser’s Signature

Note: Forgery by Stranger – drawer can’t be held liable

Forgery by Agent – drawer liable (should have made precautionary Province of Tarlac (has an account with PNB) Concepcion
measure, otherwise they are liable for contributory negligence) Emergency Hospital Associated Bank (cb)
Philippine National Bank (db)
Republic vs. Equitable Bank
 Treasury Warrants
 Forgery of Drawer’s Signature - Collecting bank is liable because of the warranty of genuineness
when indorsed
Treasurer (Dr/Db) Caranza (24) Corporacion - Collecting bank can go after the forger
- In this case, there was 50-50 liability between POT and cb. Tarlac
BPI Dr/Db
was negligent because it allowed the checks to be received by a
person who is already removed from office
Treasurer (Dr/Db) Wong, etc. (4) Equitable Bank
Dr/Db Associated Bank vs. CA (May 7, 1992)
 Forgery on a BOE
- This case is an exception to the rule: there negligence of auditor  Forged Indorser’s Signature
for clearing because the Auditor/Treasurer can only issue treasury  Order Instrument
warrants for 5 thousand or lesser value. In the present case,  Crossed check to Melissa’s RTW
checks were more than 5 thousand
- Drawee bank’s failure or delay in discovering the forgery and
giving notice within the 24 hours clearing house rule to the Dept. Store (Dr) Melissa’s RTW Rafael Sayson
collecting bank will make itself liable for the loss Associated bank (db)
- Db can no longer collect from collecting bank

Banco de Oro vs. Equitable Banking Corporation - The bank can be held for moneys had and received when the
 Bill of Exchange money is collected on the check
 Forgery of Indorser’s signature (several payees) - Real owner/payee may recover payment from bank
 Crossed Checks: can’t b encashed and should be disposed only to - The position of the bank taking the check on the forged or
payee’s account unauthorized indorsement is the same as if it had taken the check
and collected without indorsement at all
EBC (manager’s check; Drawer and Drawee) Members of - Bank is liable to the payee regardless of whether it was aware of
the unauthorized indorsement for it was negligent in not verifying
Visa Cards (forged signature) Aida Trencio BDO(cb)
endorser’s signature
- Cross-checks may be:
- BDO stamped its warranty on the genuineness of all prior i. Specially crossed – there is a particular person named
indorser’s signature thus it is liable to refund or reimburse drawee ii. Generally crossed – for payees account only; & Co.
bank with the money debted to pay payees
- Negligence of Drawer constitutes no defense for collecting bank Q: How do you treat Special vs. General?
since there is no privity between them A: If special, it warns the bank that it can’t do anything with the check unless
- BDO argued that checks were not negotiable. But they were endorsed by the person named.
estopped. Treating it as negotiable and then denying such
afterwards cannot be given credit If General (3 things):
1. This was for a definite purpose or transaction
Republic vs. Ebrada 2. It should not be encashed but only deposited
 Bill of Exchange 3. It can only be negotiated once and only to a person who has an
 Forgery of Indorser’s signature account in the collecting bank

12 angel‘s notes
NEGOTIABLE INSTRUME NTSLAW
De Leon, Assigned Cases, Class Discussion
 - Bank in case of crosschecks should investigate whether holder has
authority. In this case, bank did not investigate
- SC: nature of crosscheck serves as a warning that investigation on
the validity of the transaction should be done
Great Eastern Life Insurance Co. vs. HSBC
 Forgery of BOE
 Order Instrument
 Forged Indorser’s Signature
- ECX: party against whom it is sought to enforce such right is
precluded from setting up forgery or want of authority
 In the instant case, it is the exception that applies. In our view,
petitioner is precluded from setting up the forgery, assuming
there is forgery, due to his own negligence in entrusting to his
secretary his credit cards and checkbook including the verification
of his statements of account.
PCI Bank vs. CA
 Forged Indorser’s Signature

GELI Lazaro Melicor (forged by E.M. Maasim) PNB

(cb) H&SB (db) Ford CIR (crossed check) IBAA/PCI Citibank

- H&SB debited GELI’s account and there was no objection
- They demanded only after 4 months (learned that Lazaro Melicor
did not receive the check)
- PNB is liable for being the last indorser (guaranty under section
66)
Metrobank vs. FNCB
 Material Alteration in the amount and payee
Joaquin Cunanan CASH (deposited by Salvador Sales…)
Metrobank FNCB
- There was an alteration of the amount (from 50.00 to 50,000)
- There was an alteration on the payee (Manila Polo Club changed
to CASH)
- This case is an EXC. to the GR that collecting bank is made liable
when there is material alteration and forgery of indorser’s
signature
- EXC: FNCB’s failure to comply with the 24-hour clearing house
regulation resulted to the cease of Metrobank’s liability with
regards to the guarantee it gave for the checked encashed
- Metrobank can’t be held liable for the payment of altered checks
Republic Bank vs. CA
 Material Alteration in amount
San Miguel Corporation Roberto Delgado (amount
altered) Republic Bank (cb) FNCB(db)
- Similar Ruling with Metrobank vs. FNCB
- FNCB’s failure to raise alteration within the 24-hour clearing
house rule bears the loss
- Drawee bank should know:
o Genuineness of Drawers signatuire
o WON there are sufficient funds on drawer’s account
o Detect alterations, erasures, etc. for it has control of
drawer’s account and should be familiar with drawer’s
signature
- EXC: Negligence of the Drawer (leaving spaces)
Ford CIR (crossed check) PCI Citibank
MODUS
Rivera, Ford’s accountant *instead of delivering to CIR…+
Castro, Mgr. of PCIP *…opened Reyes account; deposited
worthless check with the same amount issued by Ford]
Citibank [worthless checks were presented for clearing
- Ruling: PCI and Citibank are both liable (50-50]
- Note that in these cases, the checks were drawn against the
drawee bank, but the title of the person negotiating the same was
allegedly defective because the instrument was obtained by fraud
and unlawful means, and the proceeds of the checks were not
remitted to the payee. It was established that instead of paying
the checks to the CIR, for the settlement of the appropriate
quarterly percentage taxes of Ford, the checks were diverted and
encashed for the eventual distribution among the members of the
syndicate. As to the unlawful negotiation of the check the
applicable law is Section 55 of the Negotiable Instruments Law
(NIL)
- The mere fact that the forgery was committed by a drawer-
payor's confidential employee or agent, who by virtue of his
position had unusual facilities for perpetrating the fraud and
imposing the forged paper upon the bank, does not entitle the
bank to shift the loss to the drawer-payor, in the absence of some
21
circumstance raising estoppel against the drawer. This rule
likewise applies to the checks fraudulently negotiated or diverted
by the confidential employees who hold them in their possession
Westmont Bank vs. Ong
 Forgery of Indorser’s signature
Island Sec Ong (sign. Forged by Tanlimco)
Westmont (cb) (both Ong and Tanlimco were its client)
Pacific Banking (db)

Illusorio vs. CA - Ong can recover from collecting bank as his signature as indorser
 Forged drawer’s Signature is wholly inoperative (the obligation to pay him still remains)
- Westmont did not verify Ong’s signature even if it had its sample
signature specimen
Ramon Illusorio Check deposited to Katherine Eugenio’s
MATERIAL ALTERATION
account Manila Banking Corporation
- Section 124 and 125 of NIL
- Different from section 14 (incomplete but delivered)
- GR: if Drawer’s signature is forged, transaction against him is
wholly inoperative Comparison
13 angel‘s notes
NEGOTIABLE INSTRUME NTSLAW
De Leon, Assigned Cases, Class Discussion
  Section 14
M (issued 50T) P A B C (HIDC)
From A to B to C, amount is changed to 150,000
- C can collect the full amount as the wrong amount is considered
correct
 Material Alteration
M (issued 50T) P A B C (HIDC)
From A to B to C, amount is changed to 150,000
Sec. 124. Alteration of instrument; effect of. - Where a negotiable
instrument is materially altered without the assent of all parties liable
thereon, it is avoided, except as against a party who has himself made,
authorized, or assented to the alteration and subsequent indorsers.
But when an instrument has been materially altered and is in the hands of
a holder in due course not a party to the alteration, he may enforce
payment thereof according to its original tenor.
- In material alteration, it presupposes that the instrument is
complete (as compared to 14 where the instrument is presumed
to be lacking)
- Ruling will be dependent on whether:
o ALTERATION NOT APPARENT
 In Section 124, it will treat the document
depending if party prior to the alteration
will approve of the alteration
 Q: if C is a HIDC, can he collect 150T?
A: No. he can only collect the right amount
of 50T
 Q: What if M and P approved the
alteration?
A: C can collect the full amount of 150T
o ALTERATION APPARENT
 As a general rule, there is a presumption
that one is a HIDC. However if the alteration
is apparent, such presumption is not
present
 If alteration is apparent, holder must prove
that he is a HIDC to be able to collect
Q: When can an alteration be considered as a material alteration?
A: Sec. 125. What constitutes a material alteration. - Any alteration which
changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment:
(d) The number or the relations of the parties;
(e) The medium or currency in which payment is to be made;
(f) Or which adds a place of payment where no place of payment
is specified, or any other change or addition which alters the
effect of the instrument in any respect, is a material alteration.
RULES ON INTERPRETATION IN CASE OF AMBIGUITY OR OMISSION
Sec. 17. Construction where instrument is ambiguous. - Where the language
of the instrument is ambiguous or there are omissions therein, the
following rules of construction apply:
- Section 17 is actually the rules on statutory construction (how to
interpret)
14
- This section is only applicable when the instrument in question is
ambiguous
(a) Where the sum payable is expressed in words and also in
figures and there is a discrepancy between the two, the sum
denoted by the words is the sum payable; but if the words are
ambiguous or uncertain, reference may be had to the figures to
fix the amount;
- GR: words prevail
- EXC: if words are vague and unclear, then figures will prevail
- Reason for the rule:
o The figures in the margin form no part of the
instrument and are simple an abridgment of the
amount payable for convenience or reference
o It is easier to change the figures or to commit a
mistake on them than when the amount is written in
words
- Note: when the amount in words has been wholly omitted in the
body of the instrument, the marginal figures may be referred to
for the purpose of supplying the amount for which it was given
(b) Where the instrument provides for the payment of interest,
without specifying the date from which interest is to run, the
interest runs from the date of the instrument, and if the
instrument is undated, from the issue thereof;
- Usually, the instrument provides of when the interest will start to
run
- However, if there is no stipulation but you have the date of
issuance, interest will run from date of issue
- If both are absent, interest will start to run from the actual date of
issuance
- If no rate of interest is mentioned, it will draw interest at the legal
rate
(c) Where the instrument is not dated, it will be considered to be
dated as of the time it was issued;
- If not dated, you can insert the true date
- An undated instrument is considered dated as of the date of its
issue
- Issue means the first delivery of the instrument complete in form ,
to a person who takes it as a holder
(d) Where there is a conflict between the written and printed
provisions of the instrument, the written provisions prevail;
- Written provision prevails because such is the latest or true
intention of the maker or drawer because they are placed there
by himself
(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
election;
- Example. A promissory note but it is with a drawee (there is
confusion whether it is a PN or BOE)
- Rule: the holder can treat it either to his election (his choice)
(f) Where a signature is so placed upon the instrument that it is
not clear in what capacity the person making the same intended
to sign, he is to be deemed an indorser;
- This section applies only when there is doubt due to the
ambiguous location of the signature
angel‘s notes
NEGOTIABLE INSTRUME NTSLAW
De Leon, Assigned Cases, Class Discussion
 - Such party is given the least liability and is not altogether
exempted from liability since he is presumed to have intended to
assume a certain responsibility by signing the instrument
(g) Where an instrument containing the word "I promise to
pay" is signed by two or more persons, they are deemed to be
jointly and severally liable thereon.
- Solidarily liable
Case: Sps. Evangelista vs. Mercator Finance Corp, et, al.
- A reading of the promissory notes shows that the liability of the
signatories thereto are solidary in view of the phrase “jointly and
severally.” On the promissory note appears the signatures of
Eduardo B. Evangelista, Epifania C. Evangelista and another
signature of Eduardo B. Evangelista below the words Embassy
Farms, Inc. It is crystal clear then that the plaintiffs-spouses signed
the promissory note not only as officers of Embassy Farms, Inc.
but in their personal capacity as well. Plaintiffs, by affixing their
signatures thereon in a dual capacity have bound themselves as
solidary debtor(s) with Embassy Farms, Inc. to pay defendant
Mercator Finance Corporation the amount of indebtedness. That
the principal contract of loan is void for lack of consideration, in
the light of the foregoing is untenable
- Being solidary liable as a surety, as separate action may be
brought against the surety whether or not the action is also
brought and prosecuted against the principal
Case: PNB vs. Concepcion Mining
- Defendant questions why the estate of Legarda was not included
as defendant
- Instrument contacting the wor “I promise…” but signed by 2 or
more persons, --- SOLIDARILY LIABLE. Thus creditor may sue either
any of the debtors independently from each other, regardless of
whether one is included or not
CHAPTER 2 –CONSIDERATION
DEFINITION OF CONSIDERATION
- Means an inducement to a contract, that is, the cause, price or
impelling influence which induces a contracting party to enter into
the contract
Note: it is different from MOTIVE which is the personal or private reasons of
a party in entering into a contract
PRESUMPTION OF CONSIDERATION
Sec. 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.
- Consideration being presumed, it need not be alleged and proved
- Note that such presumption is only prima facie thus may be
rebutted by evidence to the contrary
Case: Travel-on vs. CA
- A check which is regular on its face is deemed prima facie to have
been issued for a valuable consideration and any person whose
signature appears thereon is deemed to have become a party
thereto for value
Case: Pineda vs. De la Rama
- The presumption that a negotiable instrument was issued for a
valuable consideration is a rebuttable presumption thus it can be
rebutted by proof to the contrary
15
- To influence public officer in the performance of their duties is
contrary to law and public police thus the consideration of the
promissory note was illegal and thus void
- Promissory note is void and thus no cause of action for collection
case can arise from it
DEFINITION OF VALUABLE CONSIDERATION
Sec. 25. Value, what constitutes. — Value is any consideration sufficient to
support a simple contract. An antecedent or pre-existing debt constitutes
value; and is deemed such whether the instrument is payable on demand
or at a future time.
- Valuable consideration may in general terms be said to consist
either in some right, interest, profit, or benefit accruing to the
party who makes the contract, or some forbearance, detriment,
loss, responsibility, act, labor or service, on the other side
- It is sufficient if the consideration was a benefit conferred upon a
third person or a detriment suffered by the promisee, at the
instance of the promissor
Consideration – means any prestation sufficient to support any contract in
favor of the party to an instrument, such as the maker or indorse, and it may
consist in giving, doing, or not doing
Adequacy of Consideration
- A valuable consideration need not be adequate. It is sufficient if it
is a valuable one
Q: is it necessary that considerations are of equal value?
A: No. As long as there is a value, it is already sufficient. (ex. 5110 for 20T)
Antecedent or Pre-existing debt
- The debt may be that of a third person and the discharge of such
debt is a valuable consideration for a negotiable instrument,
whether such instrument is payable on demand or at a future
time
- It must be shown that the holder has givn up the pre-existent
debt or the right to use
- Example:
o M owes P 1T payable today. M fails to pay in cash. He
issues a check for that amount to P who accepts the
check .Here, the consideration for the check is the pre-
existing debt of M
o You owe A 5T last December but A only asked for a
promissory note today (January) --- Antecedent debt
Case: BPI vs. Roxas
- There is an adequate consideration for the issuance of the
cashier’s check as it is payment for a pre-existing debt which was
not yet satisfied
- This case also speaks of the Personal Defense in the absence or
lack or failure of consideration
- A cashier’s check is issued by bank drawn about itself. Thus, BPI
should pay because it is bound by its promise.
- The transaction between Rodrigues and Roxas is independent,
thus the cashier’s check should not be dependent upon the
account of spouses Rodriguez
ABSENCE, LACK or FAILURE OF CONSIDERATION
Sec. 28. Effect of want of consideration. - Absence or failure of
consideration is a matter of defense as against any person not a holder in
due course; and partial failure of consideration is a defense pro tanto,
whether the failure is an ascertained and liquidated amount or otherwise.
Q: is there a difference between absence and failure of consideration?
A: with regards to its effect, No.
angel‘s notes
NEGOTIABLE INSTRUME NTSLAW
De Leon, Assigned Cases, Class Discussion
Effect
- A holder in due course can demand payment - This happens when only a portion of the amount in the
- A holder in not in due course cannot demand payment. The maker instrument is negotiated
can use such absence or lack of consideration as a defense
Example:
Effect if Partial Failure
- HIDC can collect the full amount
- NHIDC can only collect the equivalent (pro tanto) of what was M (issued 100T) P (pledged) - - - - - A (80T)
delivered

Absence vs. Failure
ABSENCE
Means a total lack of any valid
consideration from the very
beginning. Consequence of which
the alleged contract must fall
Kind of Defense
- This defense is a PERSONAL DEFENSE, thus is not available to a
holder in due course
FAILURE
Means failure or refusal of one of
the parties to do, perform or comply
with the consideration agreed upon
(failure of the consideration to
materialize
- At maturity date, A can still collect 100T, however, he will only
hold the 20T in trust for P
Q: Why is A allowed to collect?
A: because he is still considered a holder for value
One who has taken a negotiable instrument as collateral security for a
debt has a lien on the instrument. As such holder of collateral security, he
would be a pledgee but the requirements therefore and the effects thereof
not being provided for by NIL,shall be governed by the provisions of the Civil
Code on pledge on incorporeal rights:

Case: PNB vs. Bartolome Picornell
- This case is an explanation of Personal Defense
- First National Bank sold the tobaccos to satisfy the debt of
Bartolome (drawer) but earned only 1,500. It wanted to get the
deficit of 500 from HvT (drawee) to whom the Tobacco were
actually delivered. Hvt accepted the bill of lading while the
tobacco were not yet delivered. However, when the tobaccos
were, Hvt asserted that there was only partial consideration
because of some defects.
- Argument of Hvt: why should they pay the deficit of 500 when
there is only partial consideration
- SC: Partial Consideration is a personal defense of Hvt against
Bartolome and not to a holder in due course (FNB). Thus, Hvt
should still pay the net to FNB.
HOLDER FOR VALUE
Sec. 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
respect to all parties who become such prior to that time.
- A holder for value is one who has given a valuable consideration
for the instrument issued or negotiated to him
Q: why only to a person who has given valuable consideration?
A: because a holder who has not given value for an instrument
obviously will suffer no loss by being unable to recover from the
primary party in the event that the latter has a personal defense
assertable by him
- If a holder for value, all parties prior you will consider you as such
Example: M issues a note to P, the payee, without consideration. P, also
without consideration, indorses it to A who, with value, indorses it to B.
Under Section 26, B is deemed a holder for value not only as regards A but
also as regards M and P. If B is a holder in due course (section 52), he may
enforce payment for the full amount of the note against M, P, and A (section
57). If B is not a holder in due course, M can set up the defense of absence of
consideration (Section 58).
Note: Collecting Bank is not a holder for value because it parted with nothing
and crediting the amount involves a mere bookkeeping entry.
Sec. 27. When lien on instrument constitutes holder for value. — Where
the holder has a lien on the instrument arising either from contract or by
implication of law, he is deemed a holder for value to the extent of his lien.
16
1. If the amount of the instrument is more than the debt secured by
such instrument, the pledge is a holder for value to the extent of
his lien. He can collect the full value of the instrument, and apply
the same to the payment of the debt but he must deliver the
surplus to the pledgor.
2. If, between the pledgor and the party liable on the instrument,
there are existing defenses, then the pledge can collect on the
instrument only to the extent of the amount of the debt
3. If the amount of the instrument is less than or the same as the
debt secured by such instrument, the pledge is a holder for value
for the full amount and may, therefore, recover all
4. If the defenses of the party liable on the instrument are real
defenses, then the pledge can recover nothing upon the
instrument.
Case: Caltex Philippines vs. CA
- A holder for value is one who has given a valuable consideration
for the instrument issued or negotiated to him
- Caltex is not a holder for value because the CTDs given to them
was not for payment but rather for security
ACCOMMODATION PARTY
Sec. 29. Liability of accommodation party. - An accommodation party is one
who has signed the instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, 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.
Accommodation Bill or note
- Is one to which the accommodation party has put his name,
without consideration, for the purpose of accommodating some
other party who is to use it, and is expected to pay it
- It is a loan of one’s credit
Accommodation Party
- Is one who has signed the instrument (requisites):
o As maker, drawer, acceptor, or indorser
o Without receiving value for the signature
o For the purpose of lending his name to some other
person
angel‘s notes
NEGOTIABLE INSTRUME NTSLAW
De Leon, Assigned Cases, Class Discussion
Accommodated Party
- Is one in whose favor a person, without receiving value therefor,
signs an instrument for the purpose of lending his credit and
enabling said party to raise money upon it
- He impliedly agrees to take up the instrument at maturity and to
indemnify the accommodation party against the consequences of
non-payment
Note: The trouble with an accommodation paper lies in the fact that it is
impossible to tell from an inspection of the instrument whether the signature
was placed on the instrument for accommodation or otherwise. The
accommodation party, however, is permitted to show by PAROL EVIDENCE
which party he accommodated.
Liability of Accommodation Party to a Holder
- GR: the one who signed the note is the one liable
Note: There is no consideration with regards to the accommodator maker.
Thus this concept is an EXCEPTION to the general rule that against NHIDC, in
the absence of consideration, you cannot be made liable.
In this scenario, whether you are a HIDC or not, the accommodator maker is
liable to pay because he is considered a SURETY (you signed intelligently).
Thus, your liability is PRIMARY and UNCONDITIONAL.
(1) Absence of Consideration not a defense – section 29, by clear
mandate makes the accommodation party liable on the
instrument to a holder for value notwithstanding such holder at
the time of taking the instrument knew him [the signatory] to be
only an accommodation party, in whatever capacity he signed the
instrument, whether primarily or secondarily
(2) Accommodation Party in Effect a Surety – the liability of the
accommodation party remains not only primary but also
unconditional to a holder for value such that even if the
accommodated party receives an extension of the period for
payment without consent of the accommodation party, the latter
is still liable for the whole obligation and such extension does not
release him because as far as a holder for value is concerned, he is
a solidary co-debtor
(3) Rule not applicable to corporations – This is because the issue or
indorsement of negotiable paper by a corporation without
consideration and for the accommodation of another is ultra vires
(4) Where Instrument vitiated by an illegality of cause – There can be
no recovery by a payee against an accommodation party on an
instrument vitiated by an illegality of cause (ex. Promise not to
prosecute estafa case)
Rights of Accommodation Party
1. Right to revoke accommodation - since a signature for
accommodation is gratuitous, it may b revoked or rescinded by
cancellation or by notice to those interested at any time BEFORE
the instrument has been negotiated for value
2. Right to Reimbursement from accommodated party – The relation
between them is, in effect, that of principal and surety, the
accommodation party being the surety. The cause of action is not
on the instrument but on an implied contract of reimbursement
3. Right to contribution from other solidary accommodation maker –
This right springs from an implied promise between the
accommodation makers to share equally the burden resulting
from the execution of the note. They are joint guarantors of the
principal debtor
17
Meaning of “without receiving value therefor”
- the last word “therefor” refers to the instrument itself and not to
the use of the name by way of accommodation
- It only means that no value has been received for the negotiable
instrument and no “without receiving payment for lending his
name” --- Thus, you can still be an accommodation party even if
you receive some consideration for the use of your name
Accommodation Party vs. Regular Party
ACCOMODATION PARTY REGULAR PARTY
Signs an instrument without Signs the instrument for vale (sec.
receiving value therefore 24)
Sings an instrument for the purpose Does not sign for that purpose
of lending his name to some other
person
Party may always show by parol Party cannot disclaim or limit his
evidence that he is only such personal liability as appearing on the
instrument by parol evidence
Cannot avail of the defense of May avail of said defense against a
absence or failure of consideration holder not in due course
against a holder not in due course
After paying the holder, may sue for He may not sue any subsequent
reimbursement the accommodated party for reimbursement
party
Case: De la Rama vs. Admiral United Saving Bank
- An accommodation party who lends his name to enable the
accommodated party to obtain credit or raise money is liable on
the instrument to a holder for value even if he receives no part of
13
the consideration. He assumes the obligation to the other party
and binds himself to pay the note on its due date. By signing the
note, Co thus became liable for the debt even if he had no direct
personal interest in the obligation or did not receive any benefit
therefrom.
Case: Garcia vs. Llamas
- In this case the note is not a negotiable instrument because it is
payable to a specific person
- Even granting arguendo that the NIL was applicable, still,
petitioner would be liable for the promissory note. Under Article
29 of Act 2031, an accommodation party is liable for the
instrument to a holder for value even if, at the time of its taking,
the latter knew the former to be only an accommodation
party. The relation between an accommodation party and the
party accommodated is, in effect, one of principal and surety --
[33]
the accommodation party being the surety. It is a settled rule
that a surety is bound equally and absolutely with the principal
and is deemed an original promissor and debtor from the
beginning. The liability is immediate and direct.
Case: Town Savings and Loan Association vs. CA
- An accommodation party is one who has signed the instrument as
marker, drawer, indorser, without receiving value therefor and for
the purpose of lending his name to some other person. Such
person is liable on the instrument to a holder for value,
notwithstanding such holder, at the time of the taking of the
instrument knew him to be only an accommodation party. In
lending his name to the accommodated party, the
accommodation party is in effect a surety for the latter. He lends
his name to enable the accommodated party to obtain credit or to
raise money. He receives no part of the consideration for the
instrument but assumes liability to the other parties thereto
because he wants to accommodate another.
Case: Crisologo-Jose vs. CA
- Consequently, to be considered an accommodation party, a
person must (1) be a party to the instrument, signing as maker,
angel‘s notes
NEGOTIABLE INSTRUME NTSLAW
De Leon, Assigned Cases, Class Discussion
 drawer, acceptor, or indorser, (2) not receive value therefor, and delivery; if payable to order, it is negotiated by the indorsement of the
(3) sign for the purpose of lending his name for the credit of some holder and completed by delivery.
other person. Based on the foregoing requisites, it is not a valid
defense that the accommodation party did not receive any Meaning of Negotiation
valuable consideration when he executed the instrument. - It is the transfer of a negotiable instrument from one person to
- The provision of the Negotiable Instruments Law which holds an another made in such a manner as to constitute the transferee
accommodation party liable on the instrument to a holder for the holder thereof
value, although such holder at the time of taking the instrument
knew him to be only an accommodation party, does not include Methods of Negotiation
nor apply to corporations which are accommodation parties. This 1. Payable to Order
is because the issue or indorsement of negotiable paper by a - Two steps required for its negotiation:
corporation without consideration and for the accommodation of i. Indorsement
another is ultra vires. Hence, one who has taken the instrument ii. Delivery
with knowledge of the accommodation nature thereof cannot - If an order instrument is delivered without
recover against a corporation where it is only an accommodation indorsement, it is deemed to be just an ordinary
party assignment

Case: Ang Tiong vs. Lorenzo Ting 2. Payable to bearer

- the accommodation party is liable to a holder for value as if the
contract was not for accommodation. It is not a valid defense that
the accommodation party did not receive any valuable
consideration when he executed the instrument. Nor is it correct
to say that the holder for value is not a holder in due course
merely because at the time he acquired the instrument, he knew
that the indorser was only an accommodation party.
- Negotiated by mere delivery
- Hence, any person in possession of this kind of
instrument is always the bearer thereof, although he
may have no legal right thereto
Note: Delivery means transfer of possession in actual or constructive from
one person to another.

Negotiation vs. Assignment

CHAPTER 3 –NEGOTIATION NEGOTIATION ASSIGNMENT
Refers only to negotiable document Refers generally to an ordinary
MODES OF TRANSFER OF AN INSTRUMENT contract
The transferee is a holder The transferee is an assignee
Transfer – the process by which property is delivered by one person to A holder in due course is subject An assignee is subject to both real
another only to real defenses and persona defenses
A HIDC may acquire a better title or Assignee merely steps into the shoes
The law does not prescribe an exclusive method of transferring negotiable greater rights under the instrument of the assignor
instruments but only the manner in which their independence of equities or than those possessed by the
defenses that might obtain between the original parties may be preserved. transferor or a prior party
A general indorser warrants the Assignor does not warrant the
4 Modes of Transferring a Negotiable Instrument solvency of prior parties solvency of prior parties unless
1. Issue expressly stipulated or the
- It is the first delivery of the instrument, complete in insolvency is known to him
form, to a person who takes it as a holder An indorser is not liable unless there Assignor is liable even without
- It is the first transfer of an instrument to a payee be presentment and notice of notice of dishonor
2. Operation of Law dishonor
- Subrogation Negotiation is governed by NIL Assignment is governed by Articles
- Succession 1624 to 1635 of the Civil Code
3. Assignment
- This method may or may not involve an indorsement in Q: when is the distinction between negotiation and assignment immaterial?
the sense of writing on the back of the instrument A: The difference may be of no material significance if there is no defense to
- You merely steps into the shoes of the assignor the obligation and only the maker is sought to be held
- Merely means a transfer of the title to the instrument,
with the assignee generally taking only such title as his Note: Whether the act involved is negotiation or assignment, payment by
assignor has, subject to all defenses available against means of promissory notes, bills of exchange and other negotiable
this assignor instruments is merely CONDITIONAL, subject to the condition that they be
- Assignment involves a transfer of rights under a CONVERTED into CASH at maturity.
contract
4. Negotiation Q: Can there be a negotiation to a payee?
- Makes it possible for the transferee to acquire a better A: two schools of thought
right to a negotiable instrument that the transferor 1. The delivery to the payee by the maker or drawer does not
had constitute negotiation because delivery is part of the creation of a
negotiable instrument
Note: both negotiation and assignment require delivery to effect a transfer 2. There can be such negotiation --- “negotiated” is not confied to
of the instrument transfer after delivery to the payee because a holder may be a
payee in possession of the instrument
Sec. 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

18 angel‘s notes
NEGOTIABLE INSTRUME NTSLAW
De Leon, Assigned Cases, Class Discussion
Q: How are these two schools of thought reconciled?
A:
(1) First delivery of instrument to payee – it is believed that the
payee, as the first holder, acquires title to the instrument not by
negotiation but by issue or issuance. If negotiation refers to an
instrument already completely executed or issued, then only the
holders subsequent to the payee can acquire title by negotiation.
(2) First delivery of instrument to other than payee – Where the
delivery by the maker or drawer is made to a person other than
the payee such as an agent of the maker or drawer, the payee
acquired title by negotiation
(3) Delivery of instrument to payee by last holder (when the
instrument is delivered back to him by the last holder) – the
indorsement of the last holder is not necessary because the payee
is remitted to his former rights and all intervening parties are
discharged from liability
Remember: An intent to be bound is NECESSARY to the creation of an
obligation, and delivery of the negotiable instrument is the operative fact
that evidences the intention of the maker or drawer to become bound by it
Note: Delivery is presumed from possession
Where Delivery Conditional --- delivery may be conditional
1. Condition Precedent – parol evidence is admissible to show that
notwithstanding deliver, the instrument was to become operative
as a contract only upon the happening of a future, contingent
event
2. Condition Subsequent – where an instrument is unconditionally
delivered as an operative contract, parol evidence is not
admissible to show a parol condition attached to the obligation of
the contract.
Indorsement, How Made
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.
- The law does not require an exclusive form by which an
indorsement may be accomplished
- But it MUST BE WRITTEN: includes print, rubber stamp or
typewritten
- The signature of the indorser, without additional words, is a
sufficient indorsement (blank); where the name of the indorsee is
specified (special indorsement)
Place of Indorsement
- May be written
i. On the instrument itself – the place is not essential. When it
is not clear in what capacity a person intended to sign, he
shall be deemed an indorser
ii. Upon a paper attached thereto – the paper is known as
ALLOGNE
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.
- GR: indorsement must be an indorsement of the entire
instrument
- Purpose of the rule: to avoid multiplicity of suits
Note: for being only a part indorsee, one is considered merely an assignee

INDORSEMENT Indorsement to Multiple Payees or Indorsees

1. Joint Payees – an indorsement purporting to transfer the
- Is the writing of the name of the payee on the instrument with instrument to two or more persons severally does not operate as
the intent either to transfer the title to the same, or to strengthen a negotiation of the instrument for again the cause of action is
the security of the holder by assuming a contingent liability for its split. However, the negotiation is valid where the indorsees are
future payment, or both joint
- Indorsement alone without delivery conveys no title and creates 2. Alternative Payees – the negotiation of the instrument may be
no holder made by the indorsement of either of the payees
- Indorsement is not only a mode of transfer. It involves also a new Q: When is partial indorsement allowed?
contract and an obligation on the part of the indorser – an implied A: it is allowed if party of the amount has already been paid, the unpaid
guaranty that the instrument will be duly paid according to the balance may be indorsed as this is expressly authorized by law
terms thereof
- It involves the certainty of two things: Classes of Indorsement
i. The identity of the indorser
ii. The genuineness of his signature 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.
Note: Indorsement and assignment should be distinguished in that the latter
is broader and sometimes include the former. Classification of Indorsement
1. Methods of Negotiation
Necessity of Indorsement a. Special
1. Indorsement is essential to the execution of an instrument b. Blank
payable to the order of the maker or drawer 2. Kind of title Transferred
2. It is also essential to the negotiation of an order instrument, not a. Restrictive
of a bearer instrument b. Non-restrictive
3. It is not necessary to a mere assignment of a negotiable or non- 3. Scope of liability of indorser
negotiable instrument a. Qualified
4. Under proper circumstances, an estoppels may take the place of b. Unqualified or General
an indorsement to uphold the transfer of a bill or note such as 4. Presence or absence of limitation
where the indorsement is forged or unauthorized and the party a. Conditional
against whom the instrument is sought to be enforced is b. Unconditional
precluded from setting up the defense of forgery or want of 5. Other kinds of indorsement
authority a. Joint
b. Successive
19 angel‘s notes
NEGOTIABLE INSTRUME NTSLAW
De Leon, Assigned Cases, Class Discussion
 c. Irregular or anomalous
d. Facultative
Sec. 34. Special indorsement; indorsement in blank. - A special indorsement
specifies the person to whom, or to whose order, the instrument is to be
payable, and the indorsement of such indorsee is necessary 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.
Special Indorsement
- The name of the payee is specified
- Known as SPECIFIC indorsement or indorsement in FULL
- Special and blank indrosements are unqualified indorsements
- Forms:
i. One that specifies the person to whom the instrument is
payable (Pay to A)
ii. One that specifies the person to whose order the instrument
is to be payable (Pay to the order of A; Pay to A or order)
Note: if the instrument is ORIGINALLY payable to BEARER, it may
nevertheless be further negotiation by mere delivery even if the original
bearer indorsed it specially but the special indorser is liable ONLY TO SUCH
HOLDERS as make title through his indorsement.
Blank Indorsement
- Is one which specifies no particular indorsee
- Consists only of the signature of the payee or indorser
- An instrument so indorsed is payable to BEARER or whoever
possesses it and may be negotiated by the indorser by delivery
alone regardless of whether the instrument is originally payable
to bearer or not
Sec. 35. Blank indorsement; how changed to special indorsement. - The
holder may convert a blank indorsement into a special indorsement by
writing over the signature of the indorser in blank any contract consistent
with the character of the indorsement.
Q: Can you convert blank to special indorsement?
A: Yes. By simply putting the name of the endorsee
- An instrument made payable to bearer by an indorsement in
blank may be converted into an order instrument by WRITING
OVER THE SIGNATURE of the indorser in blank any contract not
inconsistent with the character of the indorsement
- BUT a bearer instrument ALWAYS REMAINS a bearer instrument
negotiable by mere delivery whether the last indorsement is a
blank or special one
Sec. 36. When indorsement restrictive. - An indorsement is restrictive which
either:
(a) Prohibits the further negotiation of the instrument; or
(b) Constitutes the indorsee the agent of the indorser; 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.
- A restrictive indorsement is one so worded that it either
i. prohibits entirely the further negotiation of an instrument
ii. restricts its further negotiation to a particular person or
for a particular purose;
iii. or modifies the rights of the holders or the liabilities of
the indorser
20
Limits Rights of Indorsee
- An indorser notifies all prospective holders that the indorsee has
only the authority to deal with the instrument as thereby directed
and that the indorsee has only a restrictive title thereto
Destroys Negotiability of Instrument
- Such indorsement destroys the negotiability of the instrument and
bars further negotiation to a holder in due course
- All subsequent indorsees acquire only the title of the first indorser
nd
under the restrictive indorsement (2 paragraph)
Three classes:
(1) Prohibits further negotiation
- Ex. Pay to A only (Signed Indorser)
- The only kind of indorsement which stops the further
negotiation of an instrument
- The prohibition to transfer or negotiate must be
WRITTEN IN EXPRESS WORDS at the back of the
instrument
(2) Constitutes indorsee agent of indorser
- Ex. Pay to B for Collection (signed A)
- Ex. Pay to B as agent of A (signed A)
M P A B (collecting as agent) C
B can pass it to C. However, he can only pass on the same position as
that of himself. C therefore becomes an agent.
(3) Vests title in indorsee for the benefit of the indorser or a third
party
- Ex. Pay to B in trust for A
M P A B (holding it for A) C
- B can still pass on the instrument
- B is not necessarily an agent. What is transferred is
merely the title and not the value of the instrument
- The indorsement transfer the legal title to the
instrument to B as trustee for A, the beneficial owner.
They give notice that the paper cannot be negotiated
by B for his own debt or for his own benefit.
Note: an instrument, originally negotiable continues to be negotiable in spite
of the absence of such words in an indorsement.
Sec. 37. Effect of restrictive indorsement; rights of indorsee. - A restrictive
indorsement confers upon the indorsee the right:
(a) to receive payment of the instrument;
(b) to bring any action thereon that the indorser could bring;
(c) 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.
nd rd
- This article applies to the 2 and 3 type or restrictive
indorsement
- Under any form or restrictive indorsement, the indorsee may
receive payment on the instrument; sue there on his name; and
also negotiate the instrument except when it is prohibited in the
indorsement
- Example:
In the indorsement, “Pay to A for collection , Signed P”,
A is merely an agent of P and any action he may file on the
instrument is, therefore, subject to defenses available against P
his indorser. Similarly, if A negotiates the instrument to B, a
angel‘s notes
NEGOTIABLE INSTRUME NTSLAW
De Leon, Assigned Cases, Class Discussion
 subsequent indorsee, the latter “acquires only the title” of A, the
first indorsee, whose right is merely to collect.
If P has already been paid, A and B cannot enforce the
instrument anymore.
Sec. 38. Qualified indorsement. - A qualified indorsement constitutes the
indorser a mere assignor 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.
- Qualified indorsement is one which constitutes the indroser a
mere assignor of the title to the instrument
- Example of qualified indorsement:
o “without recourse”
o “sans recourse”
o “at indorsee’s own risk”
o “indorser not holder”
- The word “recourse” in ordinary legal and commercial usage
means a resort to a person who is secondarily liable after the
default of the person who is primarily liable
- Such indorsement shows only an UNWILLINGNESS to be
answerable for the solvency of prior parties – a prudent
precaution, particularly where the note has a long time to run
before it matures (DOES NOT WARRANT THE SOLVENCY OF
PRIOR PARTY)
Note: you read this provision in connection with Section 65 (liabilities of
qualified endorsement)
Effect of Qualified Indorsement
1. The purpose of a qualified indorsement “without recourse” is to
transfer title without guaranteeing payment by the primary party.
In other words, it makes the indroser a mere ASSIGNOR to the
instrument
2. The effect of qualified indorsement is merely to limit one’s
liability. Warranty liability is still present even if the indorsement
is qualified unless such indorsement specifically excludes
warranties. Thus, he is liable if the instrument is dishonored by
non-acceptance or non-payment due to :
a. Forgery
b. Lack of good title to the instrument indorsed
c. Lack of capacity to contract on the part of prior
parties
d. The fact that the instrument was valueless or not
valid at the time of the indorsement which fact
was known to him
Note: Qualified Indorsement limits the liability only if non-payment of party
primarily liable is due to INSOLVENCY.
Sec. 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
negotiated will hold the same, or the proceeds thereof, subject to the rights
of the person indorsing conditionally.
Absolute Indorsement
- The indorser binds himself to pay, upon no other condition than
the failure of prior parties to do so and of due notice to him of
such failure
Conditional Indorsement
- The indorser imposes some other conditions to his liability or on
the indrosee’s right to collect the proceeds of the instrument
21
- It has no effect on the further negotiation of the instrument. The
party required to pay, if he chooses, may make payment,
disregarding the condition without incurring any liability because
he is expressly authorized to do so under Section 39. But the
person who received payment will hold the proceeds subject to
the right of the conditional indorser
Example: Maturity date is Dec. 20, 2013. But condition is to pay
when A passes the Bar on 2014.
M P A B (conditionally indorsed) C
D
- M can pay on Dec. 20,2013 so that he can extinguish his
obligation. But C is only a holder in trust for B because he is NOT
yet the owner until he pass the bar exam
- Same goes with D as his ownership of the money will depend on
the ownership of C (holder in trust for the one making the
condition
- You are attacking a condition to an indorsement
Note: A condition on the FACE of the INSTRUMETN is NOT allowed. But
condition on Indorsement is allowed.
Consequences or Effects of Indorsement
Sec. 40. Indorsement of instrument payable to bearer. - Where an
instrument, payable to bearer, is indorsed specially, it may nevertheless be
further negotiated by delivery; but the person indorsing specially is liable as
indorser to only such holders as make title through his indorsement.
- This section applies only to instruments ORIGINALLY payable to
BEARER.
M P (specially indorsed) A (del.) B
- In such a case, the person indorsing specially is liable only to those
holders who can trace their title to the instrument by series of
unbroken indorsements from such special indorser
- B will have no right against P since he (B) did not obtain his title
through the indorsement of P. But A, as indorser and M, as
maker, will be liable to B.
M P (del.) A (del.) B (Ind. + del.) C
Q: Will the bearer instrument be converted into an order instrument?
A: No. Thus you can continue to indorse it by mere delivery.
Sec. 41. Indorsement where payable to two or more persons. - Where an
instrument is payable to the order of two or more payees or indorsees who
are not partners, all must indorse unless the one indorsing has authority to
indorse for the others.
- This section refers to a JOINT indorsement
- This section DOES NOT apply to instruments payable to tow or
more payees severally
- 2 exceptions to the rule requiring joint indorsment:
i. Where the payees or indorsees are partners
ii. Where the payee or indorsee indorsing has authority to
indorse for the others
M P A B C D E and F
Q: How will E and F indorse it to X?
A: it will depend if they are partners or not
angel‘s notes
NEGOTIABLE INSTRUME NTSLAW
De Leon, Assigned Cases, Class Discussion
 NOT – both signs the indorsement
PARTNERS – if one is authorized to sign, then his signature alone
is sufficient
Sec. 42. Effect of instrument drawn or indorsed to a person as
cashier. - Where an instrument is drawn or indorsed to a person
as "cashier" or other fiscal officer of a bank or corporation, it is deemed
prima facie to be payable to the bank or corporation of which he is such
officer, and may be negotiated by either the indorsement of the bank or
corporation or the indorsement of the officer.
- Ex. Pay to cashier of VECO
This means that the instrument is negotiated to VECO
and not to the person or physical officer
Sec. 43. Indorsement where name is misspelled, and so forth. - Where the
name of a payee or indorsee is wrongly designated or misspelled, he may
indorse the instrument as therein described adding, if he thinks fit, his
proper signature.
- Ex. Where the name of the payee or indorsee is “Luz M.
Cillamayor” when the surname should spell “Villamor”, the
instrument may be indorsed:
i. as therein described, thus: (Sgd.) Luz M. Villamayor
ii. Or by the same name but adding his proper signature as
follows:
(Sgd.) Luz M. Villamayor
(Sgd). Luz M. Villamor
Note: any variance between the name of the payee on the face of an
instrument and the signature on the back thereof should be ignored if the
payee and the indorser are the same person.
Sec. 44. Indorsement in representative capacity. - Where any person is
under obligation to indorse in a representative capacity, he may indorse in
such terms as to negative personal liability.
- An instrument may be indorsed by a person either personally or
through an agent. The authority of the agent need not be in
writing
- See Section 20. You do it in the same manner as when you sign for
a party primarily liable: You indicate that you are an agent and
disclose the principal
Sec. 47. Continuation of negotiable character. - An instrument negotiable in
its origin continues to be negotiable until it has been restrictively indorsed
or discharged by payment or otherwise.
- GR: an instrument negotiable in origin is always negotiable until
paid
- An instrument indorsed after it become overdue is considered
payable on demand but can nevertheless be negotiated. The
holder in this case will not be considered a holder in due course.
- EXC:
i. When the instrument has been restrictively indorsed
ii. When it has been discharged by payment or otherwise
Note: A negotiable instrument ceases to be negotiable
when it is discharged by any of the different ways
enumerated in Section 119.
Note: The general rule is that a paper which is non-negotiable in its inception
continues to be non-negotiable.
Sec. 48. Striking out indorsement. - The holder may at any time strike out
any indorsement which is not necessary to his title. The indorser whose
indorsement is struck out, and all indorsers subsequent to him, are thereby
relieved from liability on the instrument.
22
- Indorser’s stricken out are released from liability
- To know the liability, you have to know what the instrument is
originally and whether it was converted
An Instrument payable to bearer on its face
- By virtue of this section, the holder may strike out all intervening
indorsement or any of them for none of them is necessary of his
title
M P A B C
- If C cancels P’s indorsemnet, then P, whose indorsement is struck
out, and A and B “indorsers SUBSEQUENT to him” (P), are
released from liability on the instrument
- C could claim only against M becaseu A and B are also discharged
from liability because they are deprived of their right of recourse
against P.
An Instrument Originally payable to Order
- When a blank indorsement is followed by special indrosements
and the holder strikes out all indrosements subsequent to the
blank indrosement, the instrument would become payable to
bearer as the last indorsement would be in blank
- But the indorser may not strike out the payees indorsement. Since
the instrument is payable to order, it cannot be validly negotiated
without his indrosement.
M P(SI) A(SI) B(QI) C (BI) D E(SI) F
Q: Can F strike out any indorsement?
A: Yes. It can strike out E’s indorsement because it is already a Bearer
Instrument.
M P(SI) A(SI) B(QI) C (SI) D (QI) E
Q: Can E strike out?
A: No because the instrument remains to be an order instrument
Note: you cannot strike out the Blank Indorsement because it is the proof of
the coversion. Further, you cannot strike out the party that merely delivered
because there is actually nothing to strike out.
Sec. 49. Transfer without indorsement; effect of. - Where the holder of an
instrument payable to his order transfers it for value without indorsing it,
the transfer vests in the transferee such title as the transferor had therein,
and the transferee acquires in addition, the right to have the indorsement
of the transferor. But for the purpose of determining whether the
transferee is a holder in due course, the negotiation takes effect as of the
time when the indorsement is actually made.
- This section is applicable only to an instrument payable to order
- The transaction operates as an equitable assignment and the
transferee acquires the instrument subject to defenses and
equities available among prior parties
Example: Order Instrument
M P (ind. + del.) A (del.) B
Q: What if A forgot to indorse?
A: No valid negotiation.
Q: What happens to B?
A: B is not a holder. He is merely an assignee.
Q: What if the intention was really to negotiate, what is the right of B?
angel‘s notes
NEGOTIABLE INSTRUME NTSLAW
De Leon, Assigned Cases, Class Discussion
A: B has the RIGHT to have the indorsement of A. For as long as he gave up a - Every indorsement is presumed to have been made at the place
value or consideration for the instrument, B may ask for indorsement where the instrument is dated
- The presumption is rebuttalbe
Sec. 50. When prior party may negotiate instrument. - Where an
instrument is negotiated back to a prior party, such party may, subject to
the provisions of this Act, reissue and further negotiable the same. But he is
not entitled to enforce payment thereof against any intervening party to
whom he was personally liable.

- If a prior party reacquires an instrument before maturity, he may

negotiate the same further. But after paying the holder, he may
not claim payment from any of the intervening parties

Example: Order Instrument

M P A B C A

If A is the holder at Maturity date, A will go to M. There is no problem if M

will pay.

Q: What if M will not pay, to whom can A go after?

A: he cannot go after intervening parties to whom he was personally liable.
He can go to P.

If A is a holder before Maturity date, A can still further negotiate it.

Limitations on Renegotiation
In the following cases, a prior party cannot further negotiate the
instrument:
(1) Where it is payable to the order of a third person, and has been
paid by the drawer
(2) Where it was made or accepted for accommodation and has been
paid by the party accommodated
(3) In other cases, where the instrument is discharged when acquired
by a prior party

Time and Place of Indorsement

Sec. 45. Time of indorsement; presumption. - Except where an indorsement

bears date after the maturity of the instrument, every negotiation is
deemed prima facie to have been effected before the instrument was
overdue.

- Negotiation is presumed to have been made before the instrument

has matured
- If made at maturity, it becomes due the day after the date of
Maturity
- This section is important because in order to constitute one a holder
in due course, he must have taken the instrument before it was
overdue
- Example:
If delivery was made 2 days ago. For purposes of knowing that he
is a HIDC, you look at the date when the instrument was really
indorsed and whether the holder has knowledge that there was a
defect.

1/8/11 – the instrument was given to you (date of delivery)

1/10/11 – the moment it was negotiated (actual date of
indorsement)

If you have knowledge of defect before 1/10/11, you are no

longer a HIDC

Sec. 46. Place of indorsement; presumption. - Except where the contrary

appears, every indorsement is presumed prima facie to have been made at
the place where the instrument is dated.

23 angel‘s notes
NEGOTIABLE INSTRUME NTSLAW
De Leon, Assigned Cases, Class Discussion