nego (hizon notes)

NOTES ON NEGOTIABLE INSTRUMENTS LAW Kenneth and King C. Hizon ___________________________________________________________________________________________________________

Facultad de Derecho Civil 1 UNIVERSITY OF SANTO TOMAS

UNIVERSITY OF SANTO TOMAS

Faculty of Civil Law A.Y. 2013-2014 First Semester

INTRODUCTION GENERAL CONSIDERATIONS

Q: What is the governing law on negotiable instruments? A: Act No. 2031 (Negotiable Instruments Law). NOTE: The provisions of the Code of Commerce on negotiable instruments were impliedly repealed by the NIL, save for some provisions: Ex: Provisions on crossed-checks. Q: When does the NIL apply? A: Only to negotiable instruments. If the instrument is not negotiable, the instrument is not governed by the provisions of the NIL.

History Copied from American Uniform Negotiable Instruments Law which is based largely on the Bills of Exchange Act of 1882 of England.

Definition Q: What is a negotiable instrument? A:

a. It is a written contract for the payment of money b. Which is intended as a substitute for money c. And passes from one person to another as money, in

such a manner as to give a holder in due course the right to hold the instrument free from defenses available to prior parties

Functions of a negotiable instrument

Q: What are the 2 main functions of a negotiable instrument? A:

1. A substitute for money Ex: Pedro, a manufacturer, wants to buy raw materials for his production: it would be risky for him to bring

cash amounting to 2M, negotiable instruments may be used as a substitute for money

2. It is a credit instrument Ex: Pedro has money to pay for the raw materials but would like to use his cash to make his store bigger; he may obtain the raw materials from supplier by signing and delivering a promissory note in favor of his supplier. Therefore, there are more transactions that can be undertaken. Pedro can buy his raw materials and expand his store at the same time

Q: What are its functions? A:

1. It is a substitute for money 2. It is a medium of exchange 3. It is a credit instrument which increases credit

circulation 4. It increases purchasing power in circulation 5. It is proof of transactions

Q: Are negotiable instruments legal tender? A: No. R.A. 7653 provides that only notes and coins issued by the BSP are considered legal tender. Q: What are the consequences of the rule that negotiable instruments are not legal tender? A:

1. Delivery of negotiable instruments does not even produce the effect of payment. Obligations are deemed paid only when the instrument is encashed

2. The creditor may refuse to accept negotiable instruments

Negotiable v. Non-Negotiable instrument

Negotiable Non-Negotiable

As to fulfillment of the requisites under Sec.1

Contains all the requisites of Sec. 1

Does not contain

As to governing law

NIL The NIL does not apply

MERCANTILE LAW REVIEW 1: LAW ON NEGOTIABLE INSTRUMENTS



except by analogy

As to Manner of transfer

1. Negotiation 2. Assignment

1. Assignment

As to the Right of the transferee

He can be a holder in due course

Can never be a holder in due course

As to defenses

The transferee who as HDC is not subject to all defenses, only real defenses

The transferee is subject to all defenses of prior parties

Features of a negotiable instrument

Q: What are the features of a negotiable instrument? A:

1. Negotiability 2. Accumulation of secondary contracts- the indorsers

become secondarily liable not only to their immediate transferees but also to any holder

KINDS OF NEGOTIABLE INSTRUMENTS

Q: What are the 2 kinds of negotiable instrument? A:

PROMISSORY NOTE BILL OF EXCHANGE

a. An unconditional promise

b. in writing c. made by one person

to another, d. signed by the maker, e. engaging to pay on

demand, or at a fixed future time,

f. a sum certain in money

g. to order or to bearer.

i. An unconditional order

ii. in writing iii. addressed by one

person to another, iv. signed by the person

giving it, v. requiring the person

to whom it is addressed

vi. to pay on demand or at a fixed or determinable future time

vii. a sum certain in money

viii. to order or to bearer

Also known as draft in other countries

Kinds of bill of exchange

Check Drawn on a bank payable on demand

Time draft Draft payable at a fixed time

Sight or demand draft

Draft payable when the holder presents it for paymebt

Trade acceptance

Used in contracts of sale whereby the seller as drawer orders the buyer (as drawee) to pay a sum certain to the same seller (payee)

Draft Used in documentary exchange Ex: letters of credit transaction

Inland bill Drawn and payable in the Philippines

Foreign bill Does not purport to be both drawn and payable in the Philippines

Bankers acceptance

A time draft across the face of which the drawee which is a bank has written the word accepted

Clean Bill of exchange

No document is attached when presentment for payment or acceptance is made

Documentary bill of exchange

A document is attached when presentment for payment or acceptance is made

Bills in set One bill of exchange drawn in a set, each part of the set being numbered and containing a reference to the other parts, the whole of the parts constitutes one bill

Kinds of promissory notes

Certificate of deposit

A written acknowledgement of a bank of its receipt of a sum certain with a promise to repay the same

Bonds Certificate or evidence of a debt on which the issuing company or governmental body promises to pay the bondholders a specified amount of interest for a specified time, and to repay the loan on the expiration date

Debanture A bond or promissory note backed by the general credit of a corporation and usually not secured by a mortgage or lien on any specific property

Q: In what instances may a bill of exchange (BOE) be treated as a promissory note? A:

1. when the drawer and the draweee of the BOE are the same person

2. the drawee is a fictitious person 3. drawee has no capacity to contract 4. the instrument is so ambiguous that there is doubt

whether it is a bill or a note

Parties

Q: Who are the parties to a promissory note? A:

1. maker- the person who promises to pay the amount stated in the PM

2. payee- the person who is supposed to be paid by the maker

January 10, 2004

I promise to pay Leona or order, the sum of P100 on January 5, 2006.

Sgd. Carlo



NOTE: Maker- Carlo Payee- Leona Q: Who are the parties to a bill of exchange? A:

1. drawer- the person who draws and signs the instrument; he orders the drawee to pay

2. drawee- the person who is being ordered to pay; while he appears to be a party on the face of the bill, he is not yet liable until he accepts

3. acceptor- the drawee who already accepted the BOE 4. paye- the one to whom payment should be made by

the acceptor

January 2, 2004

Pay to the order of Joshua P100,000.00 on or before January 2, 2006

Sgd. Justin To: Lauren

NOTE: Drawer- Justin Drawee- Lauren Payee- Joshua

Account Name: Bebeng No. 123456A Date: June 3, 2001 PAY TO THE ORDER OF Ayel P1,000,000.00 One million only PESOS MARZAN BANK Ayala Branch Sgd: Jed Mark Makati City

NOTE: Drawer- Bebeng Drawee- Marzan Bank Payee- Ayel (Jed Mark, in this example, has a current checking account with Marzan Bank)

5. indorsers- persons who transfer or negotiate an instrument by indorsement completed by delivery

6. holder- a. the payee or indorsee of a bill or note who is in

possession of a bill or note payable to order, or b. the bearer of a note or bill payable to bearer

7. bearer- the person in possession of a bill or note which is payable to bearer

Promissory Note v. Bill of Exchange

Promissory Note Bill of Exchange

Contains an unconditional promise

Contains an unconditional order

There are 2 parties on its face:

1. maker 2. payee

There are 3 parties on its face:

1. drawer 2. drawee 3. payee

The person who signs is the maker

The person who signs is the drawer

The maker is primarily liable

The drawer is secondarily liable

The maker is primarily liable

The acceptor is primarily liable

There is only 1 presentment for payment

There are 2 presentments: 1. for acceptance 2. for payment

Bill of Exchange v. Check

Bill of Exchange Check

As to drawee

The drawee may or may not be a bank

Drawee is always a bank

When payable

May be payable: 1. on demand 2. at a fixed 3. determinable

future time

Always payable on demand

Presence of deposit or checking account

Not necessarily drawn on a deposit or checking account

Necessarily drawn on a deposit or checking account

Effect of death of drawer

Death of drawer, with knowledge of the bank, does not revoke the authority of the banker to pay

Death of drawer, with knowledge of the bank, revokes the authority of the banker to pay

Incidents in the life of a negotiable instrument

1. Preparation and signing 2. Issuance

-first delivery of the instrument to the payee 3. Negotiation

-transfer from one person to another so as to constitute the transferee a holder

4. Presentment for acceptance 5. Acceptance

-written assent of the draweee to the order 6. Dishonor by non-acceptance 7. Presentment for payment 8. Dishonor by non-payment 9. Notice of dishonor

- notice to the persons secondarily liable that the maker or the drawee/acceptor refused to pay or to accept the instrument

10. Protest (in some cases) 11. Discharge



FORM AND INTERPRETATION

Sec 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;

(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 Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. Q: How is negotiability determined? A: By ascertaining if all the requirements of Section 1 appear on the face of the instrument. Q: What are the factors to be considered? A:

1. The whole of the instrument shall be considered 2. Only what appears on the face of the instrument shall

be considered 3. Sec.1 shall be applied

NOTE: The negotiability is not determined by looking at a separate instrument

REQUISITES UNDER SEC.1

1. It must be in writing

a. The writings may be printed, in ink or in pencil

Q: May it be written using a pencil? A: The use of pencil must be avoided because such writing is not as durable as ink and is an invitation to alteration by forgery. b. It may be written in any material that substitutes paper like

cloth, leather, or parchment

Q: May it be written on a wall? A: Since negotiable instruments are intended for circulation, they should not be written on an immovable object, such as wall Q: May it be written on a stone tablet? A: It cannot be written on a stone tablet because it cannot be written on an object, which though movable, may make it inconvenient for the parties to circulate

Signed by the maker or drawer

a. The maker must sign the PN and the drawer must sign the BOE

Q: How shall it be signed? A: It may be in their handwriting, printed, engraved, lithographed, or photographed so long as they are adopted as the signature of the signer. Q: What are the contents of the signature? A: The signature may consist of the signers complete name, initials, or symbol or any other mark that is intended as the maker or drawers signature.

b. Location

Q: Where should it be found? A: It is usually placed at the bottom right corner of the instrument. However, negotiability is not affected although the signature is placed on any other part of the face of the instrument such as on its body. Ex:

Manila, Philippines January 15. 2012

I, Janette Lim Napoles, promise to pay to the order of Paloma Pineda the sum of P20,000.00

2. Must contain an unconditional promise or order to pay a

sum certain in money

Promissory Note Bill of Exchange

Contains an unconditional promise

Contains an unconditional order

Q: What is a condition? A: A condition is an event which may or may not happen. Q: What is the effect of the presence of a condition on the face of the instrument? A: It renders the instrument non-negotiable because it affects the free transferability of the instrument. NOTE: The subsequent happening of the condition does not cure such defect Examples: 1. Conditional promise

January 10, 2004

I promise to pay Leona or order, the sum of P100,000.00, if she wins the Miss Philippines-Universe title this coming May. Sgd. Carlo

WUPP



NOTE: The condition of the promise in the example is: if she wins the Miss Philippines-Universe title this coming May. Even if Leona wins said title, the instrument remains non-negotiable. However, Leona can demand payment from Carlo since the instrument is valid and she can enforce it as an ordinary contract. 2. Conditional order

January 10, 2004 Pay Leona or order the sum of P100,000.00, if she wins the Miss Philippines-Universe title this coming May.

Sgd. Carlo

To: Winnie Wagner

Promise to pay and its equivalent

NOTE: The word promise need not be used. A promise may be implied from the language used. Examples:

a. I agree to pay b. I shall pay c. I oblige myself to pay d. Good to the order of P e. Due to P or order payable on demand

Q: Is mere acknowledgment of a debt without a promise to pay enough? A: No. Examples:

1. I acknowledge my debt to Bebeng for P10,000.00 2. Borrowed P10,000 from Bebeng 3. Due Bebeng the sum of P10,000.00

NOTE: The words payable and to be paid signify an intention to pay:

1. I acknowledge my debt to Bebeng or order for P10,000.00 payable on December 1, 2012

2. I acknowledge my debt of P10,000.00 to Bebeng or order to be paid on demand

Order to pay and its equivalent

NOTE: Usually, the word order is used. However, what is important is that a command is given to the drawee to pay. The word order in the second requisite should not be confused with the same word in the fourth requisite which has another function: that of designating the another instrument as payable to order (or to bearer) for purposes of negotiability. Q: Is mere authorization enough? A: No. It gives the drawee the discretion to pay or not to pay Ex: I authorize you to pay.

Q: How about mere request? A: No. It will render the instrument non-negotiable. Ex: Please let the bearer have. NOTE: However, mere words of civility such as Mr. Walter Warren will oblige himself by paying do not make the instrument non-negotiable. Q: What stipulations make the promise or order conditional? A:

1. An indication of an account or fund out of which payment shall be made

February 28, 2011 Pay to the order of Maya Dela Rosa the sum of P15,000.00 out of my funds in your possession

Sgd. Richard Lim

2. When payment is made to depend upon a contingency

Q: What stipulations do not make the promise or order conditional? A:

1. An indication of a particular fund out of which reimbursement is to be made

February 28, 2011 Pay to the order of Maya Dela Rosa the sum of P15,000.00 and charge my payroll account

Sgd. Richard Lim

2. An indication of a particular account to be debited

with the amount 3. A statement of the transaction which gives rise to the

instrument Q: Distinguish fund for reimbursement and fund for payment. A:

FUND FOR REIMBURSEMENT FUND FOR PAYMENT

2 Process of payment: 1. Drawee pays out of his

own funds 2. He reimburses himself

from the particular fund indicated or debits the account stated in the instrument

There is only 1 step and that is that payment is to be made directly out of a particular fund.

Negotiable Not negotiable because the payment will be dependent



upon the sufficiency or availability of the fund and not on the general credit of the maker or drawer

Particular fund indicated is not the direct source of the payment but only the source of reimbursement

Particular fund indicated is the direct source of the payment

Order to pay a sum certain in money

Q: Why should it be paid in money? A: Money is the standard of value in business. It remains the same notwithstanding the rise and fall in value of other commodities. NOTE: If the instrument is payable in foreign currency, the particular kind of current money should be indicated. Q: When is the amount considered as certain? A: When the holder can determine it from the instrument itself with any necessary computation at the time the instrument is payable. 3. Must be payable on demand, or at a fixed or determinable

future time Examples:

1. Payable on a fixed date Ex: I promise to pay Mr. X or order P300,000 on January 2, 2012

2. Payable on demand Ex: I promise to pay Mr. X or order P300,000 on demand

3. Payable at a determinable future time Ex: I promise to pay Mr. X or order on or before January 2, 2012

4. Must be payable to order or to bearer

NOTE: An instrument that is payable to a specified person or entity is not negotiable. An instrument is intended to pass freely from one hand to another, to circulate in commerce as a substitute for money.

5. Identification of the drawee: Where the instrument is addressed to a drawee, he must be named or otherwise

indicated therein with reasonable certainty.

This requisite applies only to bill of exchange, and not to PM. Q: What is the ratio for this requirement? A: It is indispensable that any person who will take the BOE must know the person who will be primarily responsible under the instrument.

Ex: This is improper: designate the drawee as the person who always wears a yellow t-shirt in his office in the City Hall of Dumaguete City. Q: If the instrument is addressed to 2 or more drawees, will it be acceptable? A: Yes. Ex: To Mr. X and Mr. Y. Q: What if the instrument is addressed to 2 or more drawees in the alternative? A: This indication of drawees is not valid. Ex: To Mr. X or Mr. Y Q: What if the instrument is addressed to 2 or more drawees in succession? A: This indication of drawees is not valid. Ex: To Mr. X or in his absence or failure to pay Mr. Y Q: Give examples of non-negotiable instruments. A:

1. Treasury warrants- an order in check form drawn on the treasury of the government on which the treasury disbursements are paid. This is conditional

2. Letter of credit- there is no unconditional promise to pay; it is addressed to a specified person

3. Certificate of stock- written evidence of shareholdings of a person in a corporation; no promise or order to pay money

4. Bill of lading- it represents goods rather than a promise or order to pay money

5. Warehouse receipt- it represents goods rather than a promise or order to pay money

6. Postal money order- there are restrictions imposed on them by postal laws

Sec. 2. What constitutes certainty as to sum. - The sum payable is a sum certain within the meaning of this Act, although it is to be paid:

(a) with interest; or (b) by stated installments; 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.

Payable in money

The instrument is still negotiable even if the amount to be paid is expressed in currency that is not legal tender so long as it is expressed in money.



The promise or order to pay in goods is not negotiable. An instrument is also not negotiable if what is to be paid is money and/or another thing at the option of the maker or acceptor or anybody who is supposed to pay. Q: When is the amount considered sum certain? A: If the amount that is to be unconditionally paid by the maker or drawee can be determined on the face of the instrument. NOTE: An instrument is not certain if what is supposed to be paid is a sum certain plus another undetermined amount. Ex: I promise to pay P1000 plus all the profits that the makers bakery will earn in the month of December 2005

Interest

Stipulations like payment of interest do not affect the certainty of the sum to be paid. Ex: Pay to the order of Mr. X P2000 with interest at 20% per annum In this case, there is absolute obligation to pay a fixed amount of P2000. The interest is just an addition to the sum that is payable.

Installment Payments

Q: To be valid, what are the requirements? A:

1. the dates of each installment must be fixed or at least determinable

2. the amount to be paid for each installment must also be stated or at least determinable

Examples:

March 2, 2004 I promise to pay Bebeng or order P8000.00 in four equal installments or P2000.00 per installment, the first installment to be paid on December 5, 2005, and every 5

th day of the succeeding

months until fully paid.

Sgd. Budoy

Invalid example (not payable in stated installments):

March 2, 2004 I promise to pay Bebeng or order P8000.00 in four equal installments or P2000.00 per installment.

Sgd. Budoy

Ratio: The dates of each installment is not fixed

March 2, 2004 I promise to pay Bebeng or order P8000.00 in every month

starting September

Sgd. Budoy

Ratio: The amount of each installment and the dates of each installments are not fixed.

Acceleration clause

Q: What is an acceleration clause? A: Payment of sum in stated installments with a provision that the whole shall become due in case of default in the payment of an installment or of interest. It is one which hastens the maturity of the instrument. Nevertheless, it does not affect the negotiability of the instrument. Example:

April 23, 2010

I promise to pay to the order of Ayel the sum of P100,000.00 in ten equal monthly installments the first installment being due and payable on May 1, 2010 and the succeeding installments on the first day of each month thereafter until fully paid. In case of default in the payment of any installment on its due date, all remaining installments shall become due and payable at once.

Sgd. Sarah

Payment with exchange

This provision refers only to foreign bill of exchange. Q: What is exchange? A: It refers to the interchange of valuables and especially of bills of exchange or money of different countries with an allowance for differences in value. The negotiability of the instrument is not affected because the principal sum is still certain. Examples:

April 23, 2012 I promise to pay Mr. X or order $8000.00 United States currency payable in Philippine Pesos on January 10, 2013 at the rate of 1 Peso per Dollar (1:2)

Sgd. Mr. M

April 23, 2012 I promise to pay Mr. X or order $8000.00 United States currency payable in Philippine Pesos on January 10, 2013 at current rate of exchange at the time of payment

Sgd. Mr. M



New York City March 31, 2011

Pay to the order of Pacita Paez the sum of US $20,000.00 with exchange at the current rate at Citibank, Makati City, Philippines.

Sgd. Robert Rotschild To: Wilma Watson

Payment with attorneys fees and collection costs

Q: What is the effect of this stipulation? A: This does not render the instrument non-negotiable. Q: Why is it not rendered non-negotiable? A: Even if the sum payable is uncertain, such uncertainty occurs after maturity when the instrument is no longer negotiable in its commercial sense, i.e., the transferee will no longer be considered a holder in due course because he acquires it after the instrument becomes overdue. All that the law requires for the instrument to be negotiable is for the sum at maturity be certain. Example:

March 2, 2011

For value received, I promise to pay to the order of Paloma the sum of P100,000.00 on or before December 12, 2011, with costs of collection and attorneys fees if payment is not made at maturity.

Sgd. Dei

Sec. 3. When promise is unconditional. - An unqualified order or promise to pay is unconditional within the meaning of this Act though coupled with:

(a) An indication of a particular fund out of which reimbursement is to be made or a particular account to be debited with the amount; or

(b) A statement of the transaction which gives rise to the instrument.

But an order or promise to pay out of a particular fund is not unconditional. Q: What is a condition? A: It is a future and uncertain event, or past event unknown to the parties, the happening (positive) or non-happening (negative) of which may either give rise to an obligation or may extinguish existing ones.

SUSPENSIVE RESOLUTORY

The happening or non-happening of the event will give rise to an obligation

The happening or non-happening of the event will extinguish existing obligations

Reference to transaction

The statement of the transaction that gives rise to the obligation covered by the note or the bill does not destroy the negotiability of the instrument.

April 23, 2004 I promise to pay Bebeng or order P8000.00 representing my rental for March 2012

Sgd. Budoy

April 2, 2004 I promise to pay Bebeng or order P8000.00 to apply on the purchase price of goods that I bought from him last March 2004

Sgd. Budoy

Q: Is the instrument below negotiable?

March 24, 2004 I promise to pay Bebeng or order P8000.00 on or before April 23, 2004 subject to the terms and conditions of the Contract of Sale executed by the parties.

Sgd. Budoy

A: No. The statement that the promise or order is dependent upon the terms of a separate agreement makes the promise or order conditional and negates negotiability. Q: Is the instrument below negotiable?

March 24, 2004 I promise to pay Bebeng or order P8000.00 on or before April 23, 2004. This Note is secured by a chattel mortgage and is subject to the terms and conditions thereof.

Sgd. Budoy

A: Not negotiable because the note is subject to or restricted by the mortgage.

Sec. 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 or 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.



At a fixed period after date or sight; or

April 23, 2004 I promise to pay Ayel or order P8000.00 thirty (30) days after due date

Sgd. CJ

On or before a fixed or determinable future time specified

therein

April 23, 2004 I promise to pay Ayel or order P8000.00 on or before June 30, 2004

Sgd. CJ

February 23, 2004 I promise to pay Ayel or order P8000.00 on Good Friday of the year 2004

Sgd. CJ

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

April 23, 2004 I promise to pay Maria or order P8000.00 on the death of her father

Sgd. CJ

April 23, 2004 I promise to pay Maria or order P8000.00 thirty (30) days after the death of her father

Sgd. CJ

However, the following instrument is not negotiable because the instrument is payable at a fixed period before the occurrence of a specified event which is certain to happen. By the time that its maturity date is curtained, the instrument is already overdue.

April 23, 2004 I promise to pay Maria or order P8000.00 thirty (30) days before the death of her father

Sgd. CJ

Payable upon contingency

These are non-negotiable:

April 23, 2004 I promise to pay Bebeng or order P8000.00 upon the consummation of the sale of my lot in Tagaytay City

Sgd. CJ

April 23, 2004 I promise to pay Bebeng or order P8000.00 thirty (30) days after she passes the CPA Licensure Examination

Sgd. CJ

Sec. 5. Additional 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.

Q: What is the effect of provisions in addition to order to pay a sum of money? A: GR: Renders the instrument non-negotiable Ratio: While that part pertaining to payment of a sum of money could be negotiated, the part relating to the performance of the other act would have to be assigned.

Provisions not affecting negotiability

1. Collateral

February 23, 2004 I promise to pay Ayel or order P8000.00 on January 10, 2006. This note is secured by a chattel mortgage and the holder is authorized to sell the mortgaged property if I fail to pay at maturity date

Sgd. CJ

2. Confession of judgment

Q What is a warrant of attorney? A: It is a provision in the instrument that allows a person or attorney in advance to appear in court and confess judgment---admit the liability sought to be enforced in a future case. Q: What is the note embodying this provision? A: It is called judgment note or cognovits note. Q: Is this valid? Will it affect the negotiability of the instrument?



A: It is a void stipulation because it enlarges the field for fraud; the promissory bargains away his right to a day in court; and the effect of the instrument is to strike down the right to appeal accorded by statute. But, it does not affect the negotiability of the instrument sine on the face of the note, the act of confession is to be made after maturity.

February 23, 2004 I promise to pay Ayel or order P8000.00 on January 10, 2006. If case will be filed to collect this amount, I hereby authorize the holder to appear in court in my behalf with authority to confess judgment and admit liability under this note.

Sgd. CJ

3. Waiver by obligor

February 23, 2004 I promise to pay Ayel or order P8000.00 on January 10, 2006. Presentment for payment waived.

Sgd. CJ

February 23, 2004 I promise to pay Ayel or order P8000.00 on January 10, 2006. Exemption under homestead laws waived.

Sgd. CJ

4. Gives the option to holder

Q: Why is it that it does not affect the negotiability of the instrument? A: If the holder has the option, he can require the payment of money, thus satisfying that the instrument must be payable in a sum certain in money. Q: What is the purpose of this alternative act? A: It gives the holder a hedge against inflation, making the instrument more attractive or marketable.

February 23, 2004 I promise to pay Ayel or order P8000.00 or 50 sacks of rice at the option of the holder.

Sgd. CJ

However, the following is not negotiable:

February 23, 2004 I promise to pay Ayel or order P8000.00 or 50 sacks of rice.

Sgd. CJ

Reason: It does not state that the holder has the option.

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.

Omission of date

GR: Negotiability is not affected If the instrument is not dated, it will be considered to be dated as of the time it was issued. XPNS:

1. Where the date is necessary to fix the maturity date or to make the maturity date determinable

Example:

February 23, 2004 I promise to pay Ayel or order P8000.00 sixty (60) days from date.

Sgd. CJ

2. To determine when interest is to run 3. To fix period of prescription

Value given

February 23, 2004 For value received, I promise to pay Ayel or order P8000.00 on June 1, 2004

Sgd. CJ

NOTE: The omission of the words For value received does not render the instrument non-negotiable because every NI is deemed prima facie to have been issued for a valuable consideration. However, the nature of the consideration should be stated in the instrument if any statute requires.

Place of issuance or it is payble

Manila, Philippines February 23, 2004

I promise to pay Ayel or order P8000.00 on June 1, 2004 at the Philippine National Bank, Aurora Blvd. Branch, Cubao, Quezon City.

Sgd. CJ

Q: What are the rules if the place of payment is not stated? A: The same shall be:

1. Address of the person to make payment if stated in the instrument

2. His usual place of business or residence 3. Wherever he may be found or his last known place of

business or residence, in the order given (Sec. 73)



Sec. 7. When payable on demand. - An instrument is payable on demand:

(a) When it is so expressed to be payable on demand, or at sight, or on presentation; or

(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.

When it is so expressed to be payable on demand, or at sight,

or on presentation

February 23, 2004 I promise to pay Ayel or order P8000.00 on call

Sgd. CJ

February 23, 2004 I promise to pay Ayel or order P8000.00 at any time called for.

Sgd. CJ

February 23, 2004 I promise to pay Ayel or order P8000.00.

Sgd. CJ

Q: Give other instances when the instrument is payable on demand. A:

1. As regards the drawer, the instrument is deemed payable on demand when it is issued after it has become overdue.

June 23, 2004 I promise to pay Ayel or order P8000.00 on May 4, 2004.

Sgd. CJ

2. As regards the acceptor, the instrument is deemed payable on demand when he accepts it after it has become overdue.

3. As regards an indorser, the instrument is deemed payable on demand when he indorses it after it has become overdue.

Sec. 8. When payable to order. - The instrument is payable to order where it is drawn 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 some of 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: What is order? A: The maker of the PM empowers the payee to demand payment from him (maker) or to direct him (maker), through the process of negotiation, to pay a designated person. In case of a BOE, the drawer orders a named drawee to pay the designated payee, or to pay a third person designated by the payee, if the instrument is negotiated. Q: What are the 2 ways by which an instrument is made payable to order? A:

1. Payable to the order of a specified person

March 31, 2011 Pay to the order of Pacita Paez the sum of P20,000.00 .


2. To a specified person or his order

March 31, 2011 Pay to Pacita Paez or order the sum of P20,000.00 .


However, the following are non-negotiable:

March 31, 2011 Pay to Pacita Paez the sum of P20,000.00 .


Reason: Only the person named as payee can receive payment

March 31, 2011 Pay to Pacita Paez or his agent the sum of P20,000.00 .


Reason: An agent is merely an extension of the personality of the principal.

To whose order may an instrument be made payable

A payee who is not maker



June 23, 2004 I promise to pay Ayel or order P8000.00 on May 4, 2004.

Sgd. CJ

A payee who is not drawer or drawee

June 23, 2004 Pay Ayel or order P8000.00 on May 4, 2004.

Sgd. CJ To: Bebeng

To the order of the drawer

June 23, 2004 Pay to the order of myself the sum of P8000.00 on May 4, 2004.

Sgd. CJ To: Bebeng

June 23, 2004 Pay to the order Bebeng the sum of P8000.00 on May 4, 2004.

Sgd. Bebeng To: CJ

To the order of the maker

June 23, 2004 I promise to pay to the order of myself P8000.00 on May 4, 2004.

Sgd. CJ

June 23, 2004 I promise to pay to the order of CJ P8000.00 on May 4, 2004.

Sgd. CJ

NOTE: There must be indorsement here.

To the order of the drawee

June 23, 2004 Pay to the order of yourself the sum of P8000.00 on May 4, 2004.

Sgd. Bebeng To: CJ

June 23, 2004 Pay to the order of CJ the sum of P8000.00 on May 4, 2004.

Sgd. Bebeng To: CJ

To the order of Two or more payees jointly

June 23, 2004 I promise to pay to the order of Bebeng and Ayel P8000.00 on May 4, 2004.

Sgd. CJ

To the order of One or some of several payees

June 23, 2004 I promise to pay to the order of Bebeng or Ayel P8000.00 on May 4, 2004.

Sgd. CJ

June 23, 2004 I promise to pay to the order of Bebeng or Ayel, or any of two of them P8000.00 on May 4, 2004.

Sgd. CJ

To the order of The holder of an office for the time being

June 23, 2004 I promise to pay to the order of the Rector of the UST P8000.00 on May 4, 2004.

Sgd. CJ

Sec. 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 (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

When the only or last indorsement is an indorsement in blank.

When it is expressed to be so payable

June 23, 2004 Pay to the bearer the sum of P8000.00 on May 4, 2004.

Sgd. Bebeng To: CJ

When it is payable to a person named therein or bearer

June 23, 2004 Pay to Jed Mark or bearer the sum of P8000.00 on May 4, 2004.

Sgd. Bebeng To: CJ

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

June 23, 2004 Pay to the order of Prinsipe Abante the sum of P8000.00 on May 4, 2004.

Sgd. Bebeng To: CJ



June 23, 2004 Pay to the order of Prince Charles the sum of P8000.00 on May 4, 2004.

Sgd. Bebeng To: CJ

When the name of the payee does not purport to be the name

of any person

June 23, 2004 Pay to the order of CASH the sum of P8000.00 on May 4, 2004.

Sgd. Bebeng To: CJ

When the only or last indorsement is an indorsement in blank

June 23, 2004 I promise to pay to the order of Bebeng and Ayel P8000.00 on May 4, 2004.

Sgd. CJ

Back:

Sgd. Bebeng

NOTE: This is applicable to cases where originally, the instrument is an order instrument.

INSTRUMENTS PAYABLE TO ORDER

INSTRUMENTS PAYABLE TO BEARER

The payee must be named or indicated with reasonable certainty

The payee need not be indicated, it is enough that it is expressed to be so payable to bearer

This is negotiated by: 1. Indorsement coupled

with 2. Delivery

Negotiated by delivery even if specially endorsed

Instruments originally payable to order can be converted to bearer through blank instrument

A bearer instrument is always a bearer instrument

Sec. 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 hereof. NOTE: The language of the law need not be used. Preferably, the language of the law should be used in the instrument as to avoid any uncertainty or doubt as to its negotiability. Nonetheless, the law allows the use of equivalent words without affecting the negotiability of the instrument.

The intention of the parties must be determined

Unlike ordinary contracts, the intent of the parties must be determined only based on what is stated in the instrument. It

cannot be determined on the basis of other documents nor even on contemporaneous acts of the parties.

Sec. 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. NOTE: The negotiability of the instrument is not affected if the instrument is not dated. Q: What is the effect of an erroneous date? A: None. The negotiability of the instrument is not affected. However, 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. In law, a prima facie presumption may be rebutted by proof to the contrary. Thus, if the date appearing in the instrument is the wrong date, the party who is questioning the date or who is alleging that the date is wrong may prove the true date. Example:

November 5, 2010

Thirty days after date, I promise to pay to the order of Pablo Perdon the sum of P100,000.00

Sgd. Miguel Manansala

NOTE: November 5 is deemed prima facie to be the true date of the making of the instrument. Accordingly, the date of maturity counting from such date is December 5, 2010. 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. Q: What do you mean by ante-dated? A: An instrument is considered ante-dated if it is dated earlier than the date of issue, such as a check dated earlier April 1, 2011 is issued on May 1, 2011. Q: What do you mean by post-dated? A: An instrument is considered post-dated if it is dated ahead of the issue, such as a check dated May 1, 2011 is issued on April 1, 2011. Q: What is the reason for post-dating? A: A person may post date an instrument, usually a check, when he has no sufficient funds at the time that he is drawing the check, but intends to deposit sufficient funds to cover its amount by the date appearing thereon. He may also post-date a check to protect himself when some act is to be performed by the payee before the date of the check. The payees non-performance of



such act before the date of the check will enable him to stop its payment particularly if check is for deposit to the payees account only. Q: What is the reason for ante-dating? A: It may be ante-dated to evidence a pre-existing debt. For example, on November 1, 2010, M obtained a 60-day loan of P10,000.00 from P with promise that he will immediately issue a promissory note for such debt. However, M forgot to issue the note immediately until he remembered if after a week. So on November 8, M issues a note to evidence the pre-existing debt placing on the instrument November 1, 2010, the date when it was supposed to have been issued. Q: What is the effect of ante-dating or post-dating? A:

1. The validity and negotiability of the instrument is not affected XPN: When it is done for an illegal or fraudulent purpose NOTE: Although the implication of Sec. 12 is that the instrument is rendered invalid if the ante-dating and post-dating of the check is done for an illegal purpose, the invalidity affects holders not in due course. In case of a holder-in-due-course, his right to recover the amount of the instrument cannot be barred by any party on the ground that the instrument was ante-dated or post-dated for an illegal or fraudulent purpose.

2. If the instrument is a check, its post-dating has the effect of converting it from a demand instrument to a time instrument because it is an order to pay a specified amount at the future date indicated thereon. Accordingly, it cannot be cashed with the bank against which it is drawn or be deposited before the date stated on the check.

Q: When is title to ante-dated or post-dated instrument acquired? A: The person to whom an ante-dated or post-dated instrument is delivered acquires the title thereto not as of the date written thereon but as of the date of its delivery to him. 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.

When date may be inserted

a. When an instrument expressed to be payable at a fixed period after date is issued undated

(no date)

Thirty days after date, I promise to pay to the order of Pablo Perdon the sum of P100,000.00


b. Where the acceptance of an instrument payable at a fixed

period after sight is undated

Thirty days after sight, I promise to pay to the order of Pablo Perdon the sum of P100,000.00


To: Wendell Wagner Accepted. (No date) Sgd. Wendell Wagner

Who may insert date

The a.) payee or b.) any holder of the instrument may insert the true date of issue or acceptance. Q: What is the effect of insertion of wrong date? A: a. In the hands of a holder-in-due-course, the date so

inserted, even though it is wrong is to be regarded as the true date

b. In the hands of a holder who is not a holder-in-due-course: 1. As against parties before the wrongful insertion, the

instrument is avoided 2. As against the party guilty of the wrongful insertion and

parties subsequent to him, the instrument is not avoided

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.

Mechanically incomplete but delivered instrument Q: When does this section apply? A: This refers to an instrument which is wanting in a material particular such as the amount of the instrument, and it is delivered to another for him to fill the blank or blanks and he



negotiates it either for his own benefit or that of the person making the person. Q: What are the rules under Sec. 14? A:

1. A person in possession of an instrument that is wanting in a material particular has prima facie authority to complete it by filling up the blanks therein strictly in accordance with the authority given and within a reasonable time.

2. If a person delivers a blank paper to another person containing his signature for the purpose of converting it into a negotiable instrument, the person to whom the instrument is delivered has prima facie authority to fill it up for any amount

3. If the holder of the instrument, after it was filled up is a holder in due course, the holder may enforce the instrument as if it has been filled up strictly in accordance with the authority given and within a reasonable time.

Material Particular

Q: What are the matters mentioned in Sec. 25 which involves material alteration? A:

1. Date 2. Sum payable, either for principal or interest 3. The time and place of payment 4. The member or the relations of the parties 5. The medium or currency in which payment is to be

made 6. Which adds a place of payment where no place of

payment is specified, or any other changes or addition which alters the effect of the instrument in any respect

Prima facie authority on incomplete but delivered instrument

Q: What are the 2 kinds of prima facie which exists in a mechanically incomplete but delivered instrument? A:

1. Prima facie authority to fill up the blanks 2. Prima facie authority to fill up the instrument for any

amount, provided the following facts concur: a. There is a signature on the blank b. The person who signed the instrument in blank

delivers it to another in order that it may be converted into a negotiable instrument

Q: What do you mean by the payee is deemed to have a prima facie authority to fill it up? A: The moment the instrument is completed, the presumption is that the instrument was completed with prior authority from the maker or the drawer and that the person who completed the instrument did not exceed his authority.

NOTE: This presumption is conclusive in case of a holder-in-due-course. Filling up the blanks not in accordance with the authority given is only a personal defense.

Signed blank piece of paper

Q: What is the rule in case of a signed blank piece of paper delivered to another person for the purpose of converting the same into a negotiable instrument? A: If a person delivers a blank paper to another person containing his signature for the purpose of converting it into a negotiable instrument, the person to whom the instrument is delivered has prima facie authority to fill it up for any amount. Q: What are the requisites? A:

1. There must be delivery of a paper to another person 2. The paper that was delivered was a blank paper

containing the signature of the person who will deliver 3. The delivery was for the purpose of converting it into a

negotiable instrument Examples:

1. If Mr. M signs his name on a blank paper and delivers the said blank paper to Mr. P for the purpose of providing Mr. P a specimen of signature. Mr. M will not be liable to Mr. P if the latter converted the blank paper to a negotiable instrument;

2. If Mr. P negotiated the instrument to Mr. A who in turn negotiated the instrument to Mr. B, the present holder is not a holder-in-due-course. In such a situation, the purported maker is also not liable to Mr. B because there was no authority to convert the paper into a negotiable instrument.

Q: What are the requisites in order to hold liable a person who became a party to the instrument prior to completion? A:

1. The blank must be filled up strictly in accordance with the authority given

2. The same must be filled up within reasonable time Q: What are the rights and obligations of parties in case of wrongful completion? A:

HOLDER-IN-DUE-COURSE HOLDER-NOT-IN-DUE-COURSE

He may enforce the instrument as if it had been filled up strictly in accordance with the authority given and within a reasonable time against:

1. The parties prior to the wrongful completion

2. The party guilty of the wrongful

He can enforce the instrument as completed against:

1. The party guilty of the wrongful completion

2. The parties subsequent to the wrongful completion



completion 3. The parties

subsequent to the wrongful completion

Q: Is the last sentence applicable to a HDC? A: Yes, because under Sec. 14 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. Contra view: The HDC cannot recover from the purported maker because there was no intention on the part of the said maker to issue the instrument. Fraud in factum is a real defense which is available even against a HDC.

Nature of defense

1. If there was intention on the part of the person whose signature appears on the blank paper to convert it into a negotiable instrument but the instrument is wrongfully completed, the wrongful completion is only a personal defense. Such defense is referred to a want or lack of authority to complete instrument

2. If there was no intention on the part of the person whose signature appears on the blank paper to convert it into a negotiable instrument but the instrument, the wrongful completion is a real defense referred to as fraud in factum (fraud in factum) or fraud in esse contractus (fraud in the essence of the contract).

Q: Brad was in desperate need of money to pay his debt to Pete, a loan shark. Pete threatened to take Brads life if he failed to pay. Brad and Pete went to see Seorita Isobel, Brads rich cousin, and asked her if she could sign a promissory note in his favor in the amount of P10,000.00 to pay Pete. Fearing that Pete would kill Brad, Seorita Isobel acceded to the request. She affixed her signature on a piece of paper with the assurance of Brad that he will just fill it up later. Brad then filled up the blank paper, making a promissory note for the amount of P100,000.00. He then indorsed and delivered the same to Pete, who accepted the note as payment of the debt. What defense or defenses can Seorita Isobel set up against Pete? Explain. A: The defense (personal defense) which Seorita Isobel can set up against Pete is that the amount of P100,000.00 is not in accordance with the authority given to her to Brad (in the presence of Pete) and that Pete was not a holder in due course for acting in bad faith when accepted the note as payment despite his knowledge that it was only 10,000.00 that was allowed. 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.

Mechanically incomplete and undelivered instrument

This refers to an instrument which is wanting in a material particular, such as the amount of the instrument or the name of the payee, and it is undelivered. Q: What are the important circumstances under this situation? A:

1. The instrument is incomplete 2. The incomplete instrument has not been delivered

NOTE: In Sec. 14, there was prima facie authority to fill up the incomplete instrument because there was delivery, in Sec. 15, there is no such presumption. Q: What is the effect if a mechanically incomplete instrument is completed and delivered without authority? A: The instrument shall not be valid in the hands of any holder, as against any person whose signature was placed thereon before delivery. Q: What are the rights and obligations of the parties if a mechanically incomplete instrument is completed and delivered without authority? A: a. As against a party whose signature was placed on the

instrument before delivery

He cannot be held liable because want or lack of delivery of an instrument is a real defense. b. As against a party who signed the instrument after

completion and delivery

The instrument can be enforced against the guilty party, as well as those subsequent to him. 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.

Mechanically complete but undelivered instrument

Q: What is the nature of the contract in case of mechanically complete but undelivered instrument?



A: An instrument though complete in form is an incomplete and revocable contract until the same is delivered for the purpose of giving effect thereto. Delivery is needed in order to make the contract on the instrument complete. Before delivery, the maker or drawer may cancel the instrument.

Need for delivery

Q: What is delivery? A: It means the transfer of possession of the negotiable instrument by one person to another with the intention to transfer title to the instrument. This involved:

a. Issue- first delivery of the instrument from the maker or drawer to the payee (or bearer)

b. Negotiation- transfer from one person to another that constitutes the transferee the holder of the instrument

Q: Who makes the delivery? A:

1. Personally by the person who is supposed to transfer like the maker, drawer, or indorser

2. Authorized agent or representative NOTE: If the employee is not authorized to deliver the instrument, the contract of transfer is still incomplete.

Presumptions of valid delivery 1. In the hands of a holder-in-due-course

A valid delivery of the instrument by all parties prior to him so as to make them liable to him is conclusively presumed.

2. As between immediate parties and as regards a remote

party other than a holder-in-due-course

A valid and intentional delivery by the party sought to be charged is presumed until the contrary is proved. The presumption of valid delivery is disputable. The party sought to be charged (maker, drawer, acceptor, or endorser), in order to escape liability, may prove:

1. That he made no delivery of the instrument 2. That if there was delivery, he did not authorize the

same 3. That if he authorized or made the delivery, the same

was conditional or for special purpose only and not for the purpose of transferring the property in the instrument.

Q: Who is an immediate party? A: One who, in relation to another party, may be physically remote, but is considered an immediate party by reason of his knowledge of the conditions or limitations placed upon the delivery of the instrument, or the fact that the instrument has not been delivered. Q: What is the nature of the defense?

A: The defense of want or lack of authority to complete instrument or that the delivery was conditional or for special purpose only and not for the purpose of transferring the property in the instrument, is only a personal defense and may be availed of by any party against a holder-not-in-due-course. Examples: a. Want of delivery of complete instrument

Q: M executed a PN payable to the order of P for P10,000.00. He then placed the instrument in his safe. Without the consent of M, P took the instrument and indorsed it to A, then A to B, B to C, and C to H, holder. Is H an immediate party? What are Hs rights? A: If H was aware that P took the instrument without Ms authority, H is an immediate party although he may be physically remote from M, the maker. If H is a HDC, he can enforce the instrument against any party including M, because a valid delivery of the instrument by all parties prior to him so as to make them liable to him is conclusively presumed. In addition, P, A, B and C are liable as endorsers. If H is not a HDC, he cannot enforce the instrument against M. However, he can enforce it against , P, A, B and C, who are liable on their warranty as endorsers. b. Conditional delivery

Q: M executed a PN payable to the order of P for P10,000.00 payable to the order of P and delivered the same to P. M and P agreed that the note shall become binding on M only after M has secured the approval of his loan from the bank. Without Ms authority and before M has obtained the required bank approval, P indorsed the note to A, then A to B, B to C, and C to H, holder. What are the rights and liabilities of the parties? A: If H was a HDC, He can enforce the instrument against any party including M, because a valid delivery of the instrument by all parties prior to him so as to make them liable to him is conclusively presumed. In addition, P, A, B and C are liable as endorsers. If H is not a HDC, he cannot enforce the instrument against M. For M, the non-fulfillment of the condition is a valid defense against H. However, he can enforce it against , P, A, B and C, who are liable on their warranty as endorsers. c. Delivery for a special purpose

Ex: delivery for safe-keeping only Q: Jun was about to leave for a business trip. He signed several blank checks. He instructed Ruth, his secretary, to fill them as payment for his obligations. Ruth filled one check with her name as payee, placed P30,000.00 thereon, endorsed and delivered it to Marie. She accepted the check in good faith as payment for goods she delivered to Ruth. Eventually, Ruth regretted what she did and apologized to Jun. Immediately he directed the drawee bank to dishonor the check. When Marie encashed the check, it was dishonored.

a. Is Jun liable to Marie?



b. Supposing the check was stolen while, filled the blank check, endorsed and delivered it to Marie.is Jun liable to Marie if the check is dishonored?

A:

a. Yes. This covers the delivery of an incomplete instrument, under Section 14 of the Negotiable Instruments Law, which provides that there was prima facie authority on the part of Ruth to fill-up any of the material particulars thereof. Having done so, and when it is first completed before it is negotiated to a holder in due course like Marie, it is valid for all purposes, and Marie may enforce it within a reasonable time, as if it had been filled up strictly in accordance with the authority given.

b. No. Even though Marie is a holder in due course, this is an incomplete and undelivered instrument, covered by Section 15 of the Negotiable Instruments Law. 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, including Jun, whose signature was placed thereon before delivery.

BASIC RULES

SECTION 14 SECTION 15 SECTION 16

Refers to an incomplete but delivered instrument

Refers to an incomplete and undelivered instrument

Refers to a complete instrument but delivered

The defense that is available is a personal defense that is available only against a holder-not-in-due-course NOTE: Sorianos view: 1. If there was intention on the part of the person whose signature appears on the blank paper to convert it into a negotiable instrument but the instrument is wrongfully completed, the wrongful completion is only a personal defense. Such defense is referred to a want or lack of authority to complete instrument

2. If there was no intention on the part of the person whose signature appears on the blank paper to convert it into a negotiable

The defense available to the payor is a real defense that can be set up even against a HDC

The defense that is available is a personal defense that is available only against a holder-not-in-due-course

instrument but the instrument, the wrongful completion is a real defense referred to as fraud in factum (fraud in factum) or fraud in esse contractus (fraud in the essence of the contract).

Section 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: (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; (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; (c) Where the instrument is not dated, it will be considered to be dated as of the time it was issued; (d) Where there is a conflict between the written and printed provisions of the instrument, the written provisions prevail; (e) Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election; (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; 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. Q: When is this provision applicable? A: When the instrument is ambiguous or vague or there are omissions therein. The rules on interpretation are intended to deal with the problems enumerated therein and how they are to be resolved.

Rules

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 Ratio: The sum in words is considered to have been more carefully written. Also, the sum in words is more difficult to alter. If the words are ambiguous or uncertain, reference may be had

to the figures to fix the amount

Instrument provides for the payment of interest, without specifying the date from which interest is to run



1. If the instrument is dated, the interest runs from such date

2. If instrument is undated, interest runs from the date of its issue

I promise to pay to the order of Patricia Palermo the sum of P50,000 on June 30, 2011 with 12% interest.

Sgd. Marisa Hernandez

Thus, if the foregoing note is issued on May 10, 2011, then the interest runs from such date. If the instrument is not dated, it will be considered to be dated

as of the time it was issued If there is conflict between the written and printed provisions of

the instrument, the written provisions prevail. Ratio: The written provisions are deemed to have been made at a later time and will be considered an amendment of the printed provisions

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

I promise to pay to the order of Portia Palomares the sum of P100,000.00

Sgd. Martha Martin To: Webster Ong

The instrument makes a promise and yet it contains a drawee which is a party in a bill of exchange.

Q: In what instances may a bill of exchange (BOE) be treated as a promissory note? A:

1. when the drawer and the draweee of the BOE are the same person

2. the drawee is a fictitious person 3. drawee has no capacity to contract 4. the instrument is so ambiguous that there is doubt

whether it is a bill or a note

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 GR: liable as indorser XPN: He indicates the capacity he is signing NOTE: The maker, drawer, or acceptor must indicate in what capacity they are signing. 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

JOINT LIABILITY SOLIDARY OR JOINT AND SEVERAL LIABILITY

2 or more persons are bound to pay only their proportionate share in the obligation

2 or more persons are bound to and can be made to comply with the entire obligation

a. when the obligation expressly so states

b. when the law c. when the nature of

the obligation requires

Presumption under the law: Art.1207 of the NCC, the presumption is that the liability of the debtors is joint.

I promise to pay to the order of Potia Palomares the sum of P10,000.00

Sgd. Martha Martin Sgd. Mary Milan

Either Martin or Milan can be held liable by the holder for the whole amount of P10,000.00 since their liability is joint and several, i.e., solidary. However, if note uses the words we promise to pay, Martin and Milan can each be held liable only for P5,000.00 since their liability is only joint.

REFERENCES:

SORIANO, FIDELITO R., Negotiable Instruments: Law and Application for Business Students, 2011 Edition, GIC Enterprises & Co., Inc.

AUSTRIA SALVADOR E., and AQUINO, TIMOTEO B., Fundamentals of Negotiable Instruments Law, 2004 Edition, Central Book Supply Inc.



Section 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.

Liability of persons whose signature does not appear on an instrument

GR: A person whose signature does not appear on an instrument is not liable thereon. RATIO: A person must sign the negotiable instrument before he can be made liable under the same instrument. XPNs:

1. Where a person signs under a trade name or assumed

name; E.g. If Pauleen Alcaraz signs a promissory note he issues with Binay Entreprises, his trade name. he shall be liable on the instrument to the same extent as if he has signed his own name.

2. Where an authorized agent signs for and on behalf of his principal, the latter is liable (Sec. 20) although his signature does not appear thereon.

3. Where a person forges the signature of another, the forger is liable (Sec.23);

4. Where a person negotiates an instrument by mere delivery (Sec. 65);

5. Where the acceptor accepts the instrument on a paper other than the bill itself (Sec. 134). The separate paper which must be attached to the instrument is called allonge;

6. Where a person promises to accept in writing a bill before it is drawn (Sec. 135);

7. Where a person destroys a bill or refuses within 24 hours to return the bill accepted or not accepted (constructive acceptance) (Sec. 137).

8. Incapacitated persons who sign through their legal guardians;

Section 19. Signature by agent; authority; how shown. - The signature of any party may be made by a duly authorized agent. No particular form of appointment is necessary for this purpose; and the authority of the agent may be established as in other cases of agency.

Form of agents authority The signature of any party may be made by duly authorized agent. The authority may be oral or written as no particular form is required by law. a written authority may be made on a separate power of attorney or on the instrument itself although the latter is not required for the regularity of the signature or the indorsement of the agent.

Jai-Alai Corp of the Philippines vs. Bank of the Philippine Islands

Any person who accepts for cash checks made payable to a corporation, which can act only by its agents, without making any inquiry as to the authority of an individual to exchange checks belonging to said payee-corporation, does so at his own peril if agent is without authority. Section 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.

Liability of an agent A person signing an instrument as an agent is not liable thereon provided the following requisites are present: a. He must be duly authorized; b. Must act within the scope of his authority; c. Must disclose his principal; d. Must add words to his signature describing himself as an

agent or that he is acting in a representative capacity. Otherwise, the agent is deemed to be signing the instrument as his personal obligation and not that of another.

Examples:

E.g.

Where an officer of a corporation or other organization signs for the latter, his representative capacity is sufficiently shown by his signature followed by the title of his office and the name of the corporation or organization. Thus: Section 21. Signature by procuration; effect of. - A signature by "procuration" operates as notice that the agent has but a limited authority to sign, and the principal is bound only in case the agent in so signing acted within the actual limits of his authority.

Signature by procuration

Joy Binay By: (Sgd.) Arwin Cabanting Agent

Sgd. Constanza Brillantes As agent of Carmela Brillantes

Sgd. Dominic De Alban For: GV De Leon

Sgd. Saki De Leon President Maranan-De Leon Corporation



Q: What is procuration? A: It is the act of appointing another as ones agent or attorney. The appointment must be made on the instrument itself or on a separate power of attorney.

Effect of signature by procuration It operates as a notice that the agent has but limited authority to sign and the principal is bound only in case the agent so signing acted within the actual limits of his authority. Accordingly, it is incumbent upon the person dealing with an agent to inquire into the agents authority since the principal is liable only if the agent by procuration acted within the scope of his authority. Section 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.

Capacity of infant (minor) or corporation

A minor is incapable of giving consent to a contract (Art. 1327, NCC). Any contract entered into by him is voidable (Art. 1390). On the other hand, it is unenforceable if both parties are minors. Under the NIL, the transfer of title by a minor is effective although he is incapacitated. However, the minor can still use as a defense that he is a minor. Thus, the minor can still refuse to pay on the ground of minority. E.g. Mr. Omar Deloso (DR), issued a negotiable BOE to the payee, Ms. Lyra Gonzaga. The instrument is payable to the order of Ms. Gonzaga who in turn negotiated the instrument by indorsing and delivering it to Ms. Kristine Liu (A) who is a minor. Ms. Liu then negotiated the instrument by indorsement and delivery to Mr. William Malang (B) who in turn negotiated the instrument to Ms. Em Maranan (C) in the same manner. There is an effective transfer to Mr. Justin Matibag and Ms. Maranan but Ms. Liu can invoke minority as a defense. Mr. Matibag, Ms. Gonzaga and Mr. William cannot invoke the defense of minority of Ms. Liu. In case of corporations, they cannot perform acts beyond those that they can lawfully exercise. Such acts are ultra vires (Sec. 45, Corporation Code) which are deemed voidable. Effect of indorsement or assignment of minor or corporations

performing ultra vires act a. Minor

The indorsement made by a minor passes title to the instrument. Yet, the minor does not incur any liability on the instrument even to a holder in due course because the lack of capacity is a real or complete defense.

b. Corporation

Where the indorsement or assignment made by a corporation is ultra vires, title to the instrument likewise passes although the corporation may incur no liability thereon. Negotiation by a corporation through its officer effectively transfers title but the corporation itself may invoke the absence of capacity.

Examples:

1. Ms. Ei Medina (M) makes a PN payable to the order of

Ms. Jemae Nadonga (P). Ei issues the same to Jemae who indorses it to Mr. Vins Platon (A), a minor. Vins indorses the note to Mr. Anthony Robles (B), Robles to Ms. Juzzy Sulit (C), Sulit to Mr. Akira Vargas (D), and Vargas to Em Maranan (H), holder. a. Q: May Em (H) collect from Ei and Jemae, parties

before Vins?

A: Em, whether a holder in due course or not may collect from Ei and Jemae who cannot raise the defense that Vins is a minor because Vins indorsement passes title.

b. Q: May Em (H) collect from Anthony, Juzzy and

Akira, parties after Vins?

A: Em, whether a holder in due course or not, may collect from Anthony, Juzzy and Akira because as indorsers, they warrant that all prior parties had capacity to contract (Sec. 65 and 66);

c. Q: May Em (H) collect from Vins?

A: Em, whether a holder in due course or not may not collect from Vins because Vins minority is a real defense.

2. Maam Mendoza (M) makes a promissory note payable to the order of Diwa Bontuyan (P),a minor. Maan issues the note to Diwa who indorses it to Karlo Silva (A), Karlo to Nicole Atienza (B). Nicole to Angela Paguio (C), Angela to Lisettle Mandocdoc (D), Lisette to Anthony (H). a. Q: May Anthony collect from Maan?

A: Yes. First, Maan, by making the instrument admits the existence of the payee and his then capacity to indorse (Sec. 60). Second, the indorsement of Diwa although he is a minor passes title (Sec. 22).

b. Q: May Anthony collect from Karlo, Ico, Angela and Lisette? A: Yes. They are are indorsers who are liable on their warranty that all prior parties had the capacity to contract.

c. Q: May Anthony collect from Diwa? A: No. Diwa is not liable because minority is a real defense.

Section 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 Sec. 23

1. Where the signature on the instrument is forged; and 2. Where the signature is made without the authority of

the person whose signature it purports to be. 3. It can also be applied in cases involving irregularities

that amount to forgery. These include the presence of: i. Duress amounting to forgery;

ii. Alteration amounting to forgery; and iii. Fraud in factum.

NOTE: In these cases, the persons involved do not have the intention to be bound or to sign a negotiable instrument.

Forgery

It is the counterfeit making or fraudulent alteration of any writing and may consist in the signing of anothers name, or the alteration of an instrument in the name, amount, description of the person and the like, with the intent to defraud. Sec. 23 applies only to a signature that is forged or made without the authority of the person whose signature it purports to be.

Effect of forgery

a. The signature that is forged or made without authority is wholly inoperative;

b. GR: 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. XPNs: 1. When the party against whom it is sought to enforce

such right is precluded from setting up the forgery or want of authority, including

nego (hizon notes)

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