PREFACE

Upon first impression, the Negotiable Instruments Law may appear to be complex and abstruse. However, it is believed that the subject may be presented in a simplified and concise manner without sacrificing the proper scope, so that it may be easily understood by a wide range of readers. It is with this aim in mind that this modest work which is now on its seventh edition has been prepared.

It will be noticed that the authors did not limit themselves to merely explaining the law, giving illustrations, and citing or quoting judicial decisions and opinions of well-known writers on bills and notes. In many instances, they expressed their own opinions especially where there is a conflict of views. Needless to say, they do not pretend to speak with authority.

This book also discusses at some length the Civil Code provisions on documents of title and the Warehouse Receipts Law. The authors have deemed it fit to include as appendices important specialized laws in die mercantile field.

While this volume is intended primarily to serve as a textbook for law students, it may conveniently be used by lawyers, judges, and business executives as a handy reference.

The authors acknowledge their grateful appreciation to former Justice Catalino R. Castaneda, Jr. of the Sandiganbayan, a classmate in the U.R College of Law and co-author of "Comprehensive Review of Business Law" of the first author of this work, for his valued comments and suggestions.

HECTOR S. DE LEON HECTOR M.

DE LEON, JR.

June 2010

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TABLE OF CONTENTS

PARTI THE NEGOTIABLE INSTRUMENTS LAW (ACT NO. 2031.)

Preface ....................................................................................................... iii

INTRODUCTION 1. Historical background of our Negotiable Instruments Law ....... 1 2. Application and purpose of the Negotiable Instruments Law .. 2 3. Function and importance of negotiable instruments ................ 3 4. Characteristics or features of negotiable instruments .............. 4 5. The theory of negotiable instruments ........................................ 6 6. Forms of negotiable instruments ................................................. 6 7. Doubt resolved in favor of negotiability ...................................... 7 8. Contracts and negotiable instruments compared ..................... 7 9. Commercial papers with limited negotiability ............................ 8

TITLE I NEGOTIABLE INSTRUMENTS IN GENERAL

Chapter I. — Form and Interpretation

Section 1 ..................................................................................................... 11 1. Commercial paper defined ....................................................... 11 2. Formal requirements of negotiability in general ................... 12 3. Negotiable instrument defined ............................................... 12 4. Formal requirements explained .............................................. 12 5. Non-negotiable instrument defined ....................................... 16 6. Money defined .......................................................................... 16 7. Money not governed by Act .................................................... 17 8. Promissory note defined .................................................. ...... 17 9. Original parties to a promissory note...................................... 17

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10. Bill of exchange defined ............................................................ 21 11. Original parties to a bill of exchange ...................................... 21 12. Idea and purpose of a bill of

exchange ................................... 23 Sec. 2 ...... .................................................................................................. 24 1. Certainty of sum

payable ........... ............................................. 24 2. Sum to be paid with interest ............. ..................................... 25 3. Sum to be paid by stated

installments .................................... 27 4. Extension clauses ............................ ........................................ 28 5. Sum to be paid with

exchange ........................................... .... 28 6. Sum to be paid with costs of collection and / or

attorney's fee ............................................................................. 29 Sec. 3 .......................................................................................................... 31 1. When promissory

note contains a promise to pay ............... 31 2. When bill of exchange contains an order to pay ................... 32 3. When promise or order to pay unconditional ....................... 33 4.

Indication of a particular fund out of which

reimbursement is to be made ............................................ 34 5. Indication of a particular fund out of which

payment is to be made ........................................................ 34 6. Indication of a particular account to be debited

with the amount ... ............... .............................. ............. 35 7. Statement of transaction which gives rise to instrument..... 36 Sec.

4 ......................................................... . .............................................. 37

1. Certainty of time of payment ............... .................................

38 2. Payable "when able," etc.; within reasonable time .............. 42 Sec. 5 ......................... ................................................ ............................. 42 Acts in addition to payment of money ........................................... 42 Sec. 6 .......................................................... ................. ......................... 46 1. Effect of omission of date ......................................................... 46 2. Effect of omission of value ... .............. ............................... 47 3. Effect of omission of place........................................................ 48 4. Effect of presence of seal ......................................................... 48 5. Effect of designation of particular kind of current

money payable ............................................... ..................... 48 Sec. 7 .............................................. ............................. ........................... 49 When instrument

payable on demand .......................................... 49 Sec. 8 ....... ....................................................... ................................ ....... 52 1. When instrument

payable to order ...... ................................ 52 2. Effect where payee not named or described ......................... 54 Sec.

9 .............................................. ........................ ................................ 55 1 When instrument payable to bearer ........... ....................... .......... 55

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Sec. 10 ........................................................................................................ 61 Substance criterion of negotiability ...... ............... ......................... 61 Sec.

11 ........................................................................................................ 61 1. Presumption as to date ............................................................. 61 2. Date in instrument payable at a fixed future

date ..... ;..... .... 62 3. Date in instrument payable on demand ................................. 63 Sec. 12 ........................................ ............. ................... ............. ... .......... 63 1. Meaning of ante-

dating and post-dating ........ ...................... 63 2. Effect of ante-dating and post-dating ......... .......... ..... ......... 64 3. Date when instrument takes effect ................. ..... ................ 65 Sec. 13 ............................................................... ....................................... 65 When date may

be inserted ............ ............... ..... .......... ..... 65 Effect of insertion of wrong date ...... ....................... : ........... 66 Sec.

14 .................................................................... ................................... 67 1. Steps in issuance of negotiable instrument ............ .............. 67 2. Application of Sections 14,15, and

16 ....................... ......

68 3. Rules where instrument incomplete but delivered ............... 68 Sec. 15 ............................................................................... ^ .... ........ ...... 71 Rules where instrument incomplete and undelivered ...... ......... 71 Sec. 16 ........................................................................................................ 72 Rules where instrument mechanically complete ........ ................ 73 Sec. 17 ..................................................................... ..... .... ....... ....... ....... 77 Rules of construction in case of ambiguity or omission ... ........... 78 Sec. 18 .................................... ............ ............................ .......... ...:....„..... 82 Persons liable on an instrument ...................................................... 82 Sec. 19 ........................................................................ :.... ....... .............. .... 83 Signature by an authorized agent ..... i ................. ..... ...... .;.... ..... 83 Sec. 20 ............................................................................ ........ i..' .. ..... ..... 84 1. When agent may escape personal liability ..... . ...................... 85 2. Disclosure by agent of principal ............................................... 86 3. Use of descriptive words without disclosure of principal ..... 87 Sec. 21 ................................. ............ ... : ................ I.'....:.:. ........ i ... ..! .... 88 1. Meaning of procuration ............................. .............................. 88 2. Effect of signature by procuration ..........................................

88

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Sec. 23 ........................................................................................................ 91 1. Forgery explained .................................................................... 91 2. Application of Section

23 .......................................................... 92 3. Cases of forgery in general ....................................................... 93 4. Extent of the effect of forgery ............................ .................... 93 5. Exceptions to the general rule .................. ........ ...................... 95 6. Persons precluded from setting up the defense of forgery . 95 7. Right of drawee to recover payment made where

drawer's signature was forged .......................................... 113 8. Right of drawee to recover payment where payee's

or indorser's signature was forged..................................... 120 9. Rights of parties in cases of forged indorsements ................. 123

Chapter II. — Consideration

Sec. 24 ........................................................................................................ 131 1. Meaning of consideration in general ...................................... 131 2. Presumption of

consideration ................................................. 131 Sec. 25 ................................................................................................ ...... 132 1. Valuable

consideration in general .......................................... 132 2. Adequacy of consideration ....................................................... 133 3. Antecedent or pre-existing

debt .............................................. 134 Sec. 26 ........................................................................................................ 135 What constitutes a

holder for value ............................................... 135 Sec. 27 ........................................................................................................ 136 Where a holder has

lien on instrument ......................................... 136 Sec 28 ......................................................................................................... 138 1. Meaning of

absence or want of consideration ...................... 138 2. Meaning of failure of consideration ........................................ 138 Sec.

29 ........................................................................................................ 139 1. Definition of terms ..................................................................... 139 2. Parol evidence to prove

accommodation .............................. 141 3. Liability of accommodation party to a holder ........................ 141 4. Rights of accommodation party .............................................. 145

5. Meaning of "without receiving value therefor" ..................... 145 6. Kinds of accommodation party ................................................ 146 7. Accommodation party and regular party

distinguished ....... 146

Chapter III. — Negotiation

Sec 30 ......................................................................................................... 148 Modes of transfer of bill or note, in general ........................... 148 Three methods of transferring a negotiable instrument ...... 148

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Meaning of negotiation .................................................................... 149 Methods of negotiation ................................................................... 150 Payment of instrument by drawee

not negotiation ...................... 151 Meaning of assignment .................................................................... 151 Effect of delivery of order

instrument without indorsement ... 151 Negotiation and assignment distinguished ................................... 152 When distinction not

material ........................................................ 153 Payment by means of instrument merely conditional .................... 153 Can there be a negotiation to a payee? ...........................................

153 Delivery of negotiable instrument ..................................................... 154 Where delivery conditional ................................................................ 155 Sec.

31 ........................................................................................................ 156 1. Meaning and nature of indorsement...................................... 156 2. Indorsement and assignment

distinguished .......................... 157 3. Necessity of indorsement ........................................................ 157 4. Form of

indorsement ............................... ............................... 157 5. Place of indorsement ................................................................ 159 6. Use of allonge for

indorsement ............................................... 159 Sec. 32 ........................................................................................................ 159 1. Indorsement must

be of entire instrument ........................... 160 2. Indorsement to multiple payees or indorsees ....................... 160 3. When partial indorsement allowed ........................................

161 Sec. 33 ........................................................................................................ 161 Classification of indorsement .......................................................... 161 Sec.

34 ............................................................................. ......................... 162 1. Special indorsement explained ................................................ 162 2. Blank indorsement

explained .................................................. 163 Sec. 35 ........................................................................................................ 164 Conversion of blank

indorsement to special indorsement .......... 164 Sec. 36 ........................................................................................................ 166 1. Restrictive indorsement explained .......................................... 166 2. Effect of absence of words of

negotiability ............................ 168 Sec. 37 ........................................................................................................ 168 Rights of indorsee in

restrictive indorsement ............................... 169 Sec. 38 ........................................................................................................ 169 1. Qualified

indorsement explained ............................................ 169 2. Effect of qualified indorsement .............................. ............... 170 Sec.

39 ........................................................................................................ 172 1. Absolute and conditional indorsements explained ............... 172 2. Different combinations of

indorsements ............................... 173 Sec. 40 ........................................................................................................ 173

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1. Effect of special indorsement where instrument

originally payable to bearer ..................................................... 174 2. Application of Section 40 ................................................... ..... 175 Sec.

41 ...................................... ............................................................... 175

1. Indorsement where instrument payable to two

or more joint payees or indorsees ........... ....................... .... 176 2. When joint indorsement by all payees or indorsees

not required .................................................................. ........... 176 Sec. 42 ....................................................................................................... 177

Indorsement where instrument drawn or indorsed to a person as cashier ...................................................................... 177 Sec. 43 ....................................................................................................... 178 Indorsement where name misspelled, etc .................................... 179 Sec. 44 ....................................................................................................... 179 Indorsement in representative capacity ........................................ 179 Sec. 45 ....................................................................................................... 179 Presumption as to time of indorsement ........................................ 179 Sec. 46 ....................................................................................................... 1

80 Presumption as to place of indorsement ...................................... 180 Sec. 47 ..................................................................................... ................ i8i

1. Continuation of negotiable character of originally

negotiable instrument ............................................................. 181 2. Conversion from non-negotiable to negotiable instrument 181 Sec.

48 ............. ......................................................................................... 182 When holder may strike out indorsement .................................... 182 Sec.

49 ....................................................................................................... I84 Effect of transfer without indorsement ................................. 184 Effect of indorsement after

transfer ....................................... 186 Sec. 50 ............................................ ......................................................... 186 1. Right of prior party to

negotiate.............................................. 186 2. Limitations on renegotiation ................................................... 188

Chapter IV. — Rights of the Holder

Sec. 51 ....................................................................................................... I89 1. Classes of holders ...................................................................... 189 2. Rights of holder in

general ....................................................... 190 3. Right of transferee of unindorsed instrument to sue ........... 191 Sec. 52 ..................................................... ................................................ 191

1. What constitutes a holder in due course ............................... 191 2. Payee as holder in due course ................................................. 193

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3. Drawee as holder in due course .............................................. 194 4. Instrument complete and regular upon its face .................... 195 5. Holder before instrument is

overdue ...................................... 196 6. Where instrument is part overdue and in part not ............... 197 7. Holder without notice of dishonor .......................................... 199 8. Holder in good faith ................................................................... 200 9. Effects of crossing a check ........................................................ 201 10. Holder for value .......................................................................... 203 11. Holder without notice of infirmity in instrument

or defect of title ......................................................................... 203 Sec. 53 ......................................................... ............................................... 204 Holder in due course

in instrument payable on demand ............. 204 Sec. 54 ........................................................................................................ 205 1. Effect of notice

before full payment ........................................ 205 2. When Section 54 not applicable .............................................. 206 Sec.

55 ....................................................................................................... 208 1. Defective title in general ........................................................... 208 2. When title of a person

defective ............................................ 208 3. Good faith of taker and negotiator.......................................... 208 Sec.

56 ........................................................................ ................ ............. 217 What constitutes notice of infirmity or defect .......................... 217 Sec.

57 ........................................................................................................ 221 1. Rights of a holder in due course ............................................... 221 2. Importance and foundation of due course

holding .............. 221 3. Real defenses available against a holder in due course ........

222 Sec. 58 ........................................................................................................ 222 1. Defenses in general ................................................................... 223 2. Immediate, remote, and prior parties explained ................... 226 3. Defenses available against a holder not a holder

in due course ...................................... ....................................... 226 4. Defenses subject to estoppel ........................ ......................... 227 5. Fraud in factum and fraud in inducement

distinguished ..... 227 6. Rights of holder not in due course ........................................... 228 7. Right of holder not in due course to receive payment....... 228 8. Rights of purchaser from a

holder in due course ................... 229 Sec. 59 ........................................................................................................ 231

When holder presumed a holder in due course ............................ 232

Chapter V. — Liabilities of Parties

Sec. 60 ........................................................................................................ 234 1 Classification of parties according to liability 234

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3. Liability of maker ..................... .................................................... 235 Sec. 61 ..... ................................... ........................................................... 236 1. Liability of

drawer ...................................................................... 237 2. Drawer distinguished from maker .......................................... 238 Sec. 62 ....................................................................................................... 239 Liability of acceptor ........ ......................................................... 239 Liability depends on tenor of acceptance .............................. 240 Effect of acceptance of an altered bill .................................... 241 Warranties of the acceptor .... ...... ........................................ 243 Payment without acceptance .................................................. 243 Sec. 63 ......................................................... ............................................ 245 1. When a person deemed an indorser ...................................... 245 2. When a person liable as guarantor or surety .......................

246 3. Liability of agent bank for collection ....................................... 247 Sec. 64 ....................................................................................................... 248 1. Irregular or anomalous indorsement explained .................... 248 2. When a person an irregular or anomalous indorser ............ 248 3. Rules as to liability of irregular or anomalous indorser ........ 249 4. Warranties of irregular indorser ............................................. 250 Sec. 65 ....................................................................................................... 250 1. Negotiation by delivery / qualified indorsement .................. 251 2. Warranty liability of one negotiating by delivery and

of qualified indorser ................................................................. 251 3. Liability of collecting/issuing book .......................................... 252 4. Sale of public or corporate

securities...................................... 253 Sec 66........................... ............................................................................ 253 1. Warranty liability of

general or unqualified indorser ............ 254 2. Right of holder not in due course to enforce warranties

of general indorser ........ ......................................................... 256 3. Conditions precedent to make indorser liable ........ ..... ...... 257 4. Indorser's liability as warrantor distinct from

his liability to pay ................... ..... ................. . ........................ 257 5. Indorser and drawer distinguished ......................................... 258 6. General indorser and irregular indorser

distinguished ......... 258 Sec. 67 ................................ ......... ...... .................................................. 259 Liability of indorser of bearer instrument ..................................... 259 Sec.

68 ....................................................................................................... 259 1. Order of liability among indorsers ........................................... 259 2. Liability of joint payees or joint indorsees

who indorse ....... 260 3. Successive negotiations contemplated .................................. 261 Sec. 69 ................................................... .................................................. 261 1 Liability of an agent

or broker 261

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Chapter VI. — Presentment for Payment

Sec. 70 ........................................................................................................ 262 1. Meaning of presentment for payment............................... 262 2. Presentment for payment to person primarily liable

not necessary ............................................................. ............. 262 3. Presentment for payment to persons secondarily

liable necessary ......................................................................... 264 Sec. 71 ........................................................................................................ 264 Date of presentment

of instrument .......................... .................... 264 Sec. 72 ........................................................................................................ 266 Requisites for a

sufficient presentment for payment ................... 266 Sec. 73 ....................................................................................................... 267 Place of

presentment ............. .......................................................... 268 Sec. 74 ....................................................................................................... 268 1. Mode of

presentment for payment ................................. ..... 269 2. Exhibition of the instrument ................................................. 269 Sec.

75 .............................. .......... ............................................................. 270

Presentment where instrument payable at a bank ............. ...... .................................................................................. 270 Sec.

76 .................................................................................. .................... 271 Presentment where principal debtor is dead ...... ......................... 271 Sec.

77 ................................... .................................................................... 272 Presentment to persons liable as partners ................. ................. 272 Sec.

78 ............................................................................................. ......... 272 Presentment to joint debtors .......................................................... 272 Sec.

79 ............................................................................................... ....... 273 When presentment not required to charge drawer ............ ...... 273 Sec.

80 ....................................................................................................... 274 When presentment not required to charge indorser ................... 274 Sec.

81 ........................................................................................................ 274 When delay in making presentment excused ............................... 274 Sec.

82 ........................................................................................................ 275 1. When presentment may be dispensed with .......................... 275 2. Summary of rules as to presentment for

payment ............... 276 Sec. 83 ....................................................................................................... 276 When instrument

dishonored by non-payment ........................... 277 Sec. 84 ........................................................................................................ 277

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