negotiable instruments law by atty. george ortha ii.pdf

8/16/2019 Negotiable Instruments Law by Atty. George Ortha ii.pdf

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NEGOTIABLE INSTRUMENTS LAWBAR REVIEW 2016

We may not know what the future holds

but we can trust the One who holds the future.

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NEGOTIABLE INSTRUMENTS LAW(Act No. 2031)

I. GENERAL CONCEPTS

Negotiable Instrument (2005 Bar Exam) - a

written contract for the payment of money whichcomplies with the requirements of Sec. 1 of theNIL, which by its form and on its face, is intendedas a substitute for money and passes from hand tohand as money, so as to give the holder in duecourse (HDC) the right to hold the instrument freefrom defenses available to prior parties. (Revieweron Commercial Law, Sundiang and Aquino)

Functions of Negotiable Instrument:1. Substitute for money2. Medium of exchange3. Credit instrument which increases credit

circulation4. Increase purchasing medium in circulation5. Evidence of transaction

Two Distinctive Features/Characteristics of NI:(2005 Bar Exam)1. Negotiability - it is that attribute or property

whereby a bill or note or check may pass fromhand to hand similar to money, so as to givethe holder in due course the right to hold theinstrument and to collect the sum payable forhimself free from defenses.

2. Accumulation of Secondary Contracts -

secondary contracts are picked up and carriedalong with Negotiable Instruments as they arenegotiated from one person to another; or inthe course of negotiation of negotiableinstruments, a series of juridical ties betweenthe parties thereto arise either by law or byprivity. The indorsers become secondarilyliable to the holder.

Distinctions between Negotiable Instrumentsand Non-Negotiable Instruments

NEGOTIABLE

INSTRUMENTS

NON-NEGOTIABLE

INSTRUMENTS1. Must contain all

requisites of Sec.11. Does not contain all

requisites of Sec.1

2. Transferable bynegotiation andassignment

2. Transferable byassignment only

3. HDC can haverights better than histransferor

3. A transfereeacquires no better rightthan his transferor

4. Prior parties warrantpayment.

4. Prior parties do notwarrant payment butmerely the legality ofhis title

5. Governed by NIL 5. NIL applies only byanalogy

6. Transferee can be aHDC.

6. Transferee isassignee only andcannot be a HDC

7. A HDC takes the NIfree from personaldefenses.

7. All defensesavailable to priorparties may be raisedagainst the lasttransferee.

Kinds of Negotiable Instruments: (2002 BarExam)

1. Promissory Note (PN) – an unconditionalpromise in writing made by one person toanother, signed by the maker, engaging to payon demand, or at a fixed or determinablefuture time, a sum certain in money to order orto bearer (Sec. 184).

2. Bill of Exchange (BE) - an unconditional orderin writing addressed by one person to another,signed by the person giving it, requiring theperson to whom it is addressed to pay ondemand or at a fixed or determinable futuretime a sum certain in money to order or tobearer (Sec. 126).

3. Check - a bill of exchange drawn on a bankpayable on demand (Sec. 185).

Kinds:

• Manager’s / Cashier’s Check – drawn by abank on itself and therefore, it is a primaryobligation of the bank.o It is accepted in advance by the act of

its issuance and is not subject to

countermand by the payor afterindorsement.

o The bank’s manager signs manager’scheck while cashier’s check is signedby the bank cashier.

• Memorandum Check – it is like anordinary check except that the word“memorandum,” “mem” or “memo” iswritten upon the face of the check,signifying that the drawer engages to paythe bona fide holder absolutely, and notupon a condition to pay upon presentmentat maturity and if due notice of the

presentment and non-payment should begiven. This check is not to be presentedfor payment, but will be redeemed by thedrawer himself.

• Certified Check – one drawn by adepositor upon funds to his credit in abank which a proper officer of the bankcertifies will be paid when duly presentedfor payment

• Traveler’s check – one upon which thepurchaser’s signature must appear twice –at the time he buys it and also at the timehe uses it. It has the characteristics of a

cashier’s check of the issuer.• Crossed check (1995, 1996, 2004, 2005

Bar Exams) – when 2 parallel lines aredrawn across its face or across a cornerthereof. If the name of a bank appearsbetween the parallel lines, the check issaid to be specially crossed , and paymentshould be made only if presented by thenamed bank. If no name appears between

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2016 Notes on Negotiable Instruments Law by Prof. George Ortha II

for Jurists Bar Review Center ™






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the parallel lines, the check is said to begenerally crossed, and payment should bemade only upon presentment by somebank.

• Effects of crossing a check:a. That the check may not be

encashed but only deposited inthe bank;b. That the check may be

negotiated only once to one whohas an account with a bank; and

c. That the act of crossing the checkserves as a warning to the holderthat the check has been issuedfor a definite purpose so that hemust inquire if he has receivedthe check pursuant to thatpurpose.

• Stale check – one which has not beenpresented for payment within areasonable time after its issue.

Iron Clad Rule: Prohibits the countermanding ofpayment of certified checks (Republic of thePhilippines v. PNB. GR No. 16106. December 1,1961). But the holder must be a HIDC (Mesina v.IAC , 145 SCRA 497)

Bills in Set: one composed of several parts, eachpart numbered and containing a reference to theother parts, the whole of the parts constituting butone bill.

Rights of holders where parts are negotiatedseparately:1. If both are HIDC, the holder whose title first

accrues is considered the true owner of thebill.

2. But the person who accepts or pays in duecourse shall not be prejudiced.

Obligations of holder who indorses 2 or more partsof the Bill in Set:1. The person shall be liable on every such part.2. Every indorser subsequent to him is liable on

the part he has himself indorsed, as if such

parts were separate bills.

Distinctions between a Negotiable Instrumentand a Negotiable Document of Title (2005 BarExam)

NEGOTIABLEINSTRUMENT

NEGOTIABLEDOCUMENT OF

TITLE

1. Subject is money 1. Subject is goods

2. Is itself the propertywith value

2. The document is amere evidence oftitle – the things of

value being thegoods mentioned inthe document

3. Has all the requisitesof Sec. 1 of NIL

3. Does not havethese requisites

4. A holder of NI mayrun after thesecondary partiesfor payment ifdishonored by theparty primarily liable

4. Intermediate partiesare not secondarilyliable if thedocument isdishonored

PROMISSORYNOTE

BILL OF EXCHANGE

1.Unconditionalpromise

1.Unconditional order

2. Involves 2 partieson its face

2.Involves 3 parties onits face

3. Person who issuesis the maker

3. Person who issues isthe drawer

4. Maker is primarilyliable

4. Drawer is onlysecondarily liable

5. Party primarily liableis the maker

5. Party primarily liableis the acceptor

6. One presentmentonly: for payment

4. Could be twopresentments: foracceptance and forpayment

When a BILL may be treated as a NOTE:1. Drawer and drawee are the same person.2. Drawee is a fictitious person.3. Drawee has no capacity to contract.4. When instrument is so ambiguous, the holder

may treat it either as a BILL or a NOTE.

BILLOF EXCHANGE CHECK

1.Not necessarilydrawn on a deposit.The drawee neednot be a bank.

1.It is necessary that acheck is drawn on abank deposit. Thedrawee is always abank.

2.Death of a drawerof a BOE, with the

knowledge of thebank, does notrevoke the authorityof the drawee to pay

2.Death of the drawerof a check, with theknowledge of thebank, revokes theauthority of the bankerto pay

3. May be presentedfor payment within a

reasonable time afterits last negotiation because it may befurther negotiated

3. Must be presentedfor payment within a

reasonable time afterits issue.

4.May be payable ondemand or at a fixedor determinable

future time

4. Always payable ondemand

5. Presentment foracceptance may berequired (Sec. 143)

5. Need not bepresented foracceptance

Other Forms of Negotiable Instruments1. Certificate of deposit issued by banks, payable

to the depositor or his order, or to bearer2. Trade acceptance3. Bonds, which are in the nature of promissory

notes4. Drafts, which are bills of exchange drawn by

one bank upon another! All of these must comply with Sec. 1, NIL









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Note: Postal Money Order, Treasury Warrant,Certificate of Stock, Letter of Credit, Bill of Ladingand Warehouse Receipts are not negotiableinstruments.

Legal TenderThat kind of money that the law compels a creditorto accept in payment of a debt when tendered bythe debtor in the right amount. Under Sec. 52 ofRA 7653, all notes and coins issued by the BSPshall be legal tender in the Philippines.

Legal Tender Power of:Notes – no limit as to amountCoins –

a. P1, P5 & P10 – up to P1,000b. P0.25, P0.10, P0.05 & P0.01 – up to P100

(BSP Circular No. 537, Series of 2006)

Note: A negotiable instrument (including check)

although intended to be a substitute for money, isnot legal tender.

SEC. 60. Legal Character. _ Checks representingdemand deposits do not have legal tender powerand their acceptance in the payment of debts, bothpublic and private, is at the option of the creditor:Provided, however, That a check which has beencleared and credited to the account of the creditorshall be equivalent to a delivery to the creditor ofcash in an amount equal to the amount credited tohis account. (RA 7653)

Incidents in “Life” of Negotiable Instrument1. Preparation and signing2. Issue3. Negotiation4. Presentment for acceptance, in certain kinds

of bills of exchange5. Acceptance6. Dishonor by non-acceptance7. Presentment for payment8. Dishonor by non-payment9. Notice of dishonor10. Protest, in some cases11. Discharge

Issue - the first delivery of the instrument,complete in form, to a person who takes it as aholder.

Delivery - transfer of possession, actual orconstructive, from one person to another

Holder – refers to the:a. If ORDER instrument - The payee or

indorsee of a bill or note who is inpossession of it, or

b. If BEARER instrument - The bearer

thereof (sec.191)

Bearer - the person in possession of a bill or notewhich is payable to bearer.

II. NEGOTIABILITY

Requisites of Negotiability (Sec. 1, NIL) (1996Bar Exam)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; ande. Where the instrument is addressed to a

drawee, he must be named or otherwiseindicated therein with reasonable certainty.

Note: Do not be confused with the word “order”under “b” and “d”

1. Must be in writing, signed by the maker ordrawer;- Otherwise it cannot be a substitute for money.

- Signature may be in any form like initial ormark. No particular location.

2. Must contain an unconditional promise or orderto pay a sum certain in money;

Certainty of sum payable The sum payable is a sum certain although it is tobe paid:

a. With interest; orb. By stated installments; orc. By stated installments, with a provision

that, upon default in payment of any

installment or of interest, the whole shallbecome due; or

d. With exchange, whether at a fixed rate orat the current rate; or

e. With costs of collection or an attorney'sfee, in case payment shall not be made atmaturity. (sec. 2)

" Interest stipulated but not specified – legalinterest.

" Interest not stipulated – legal interest will bepaid when the debtor incurs in delay (Art.2209, NCC)

" Interest due shall earn legal interest from thetime it is judicially demanded (Art. 2212, NCC)

Note: NI need not be payable in legal tender.

When promise or order unconditional An unqualified order or promise to pay isunconditional though coupled with:

a. An indication of a particular fund out ofwhich reimbursement is to be made or aparticular account to be debited with theamount; or

b. A statement of the transaction which givesrise to the instrument.

" Mere acknowledgment insufficient." An order or promise to pay out of a particular

fund is not unconditional because, in effect, itis subject to the condition that the fund issufficient.









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FUND FORREIMBURSEMENT

PARTICULAR FUNDFOR PAYMENT

1. Drawee pays thepayee from his ownfunds; afterwards,the drawee pays

himself from theparticular fundindicated.

1. There is only oneact-the draweepays directly fromthe particular fund

indicated.Payment is subjectto the conditionthat the fund issufficient.

2. Particular fundindicated is NOT thedirect source ofpayment but onlythe source ofreimbursement.

2. Particular fundindicated is thedirect source ofpayment.

3. Payable on demand or at a fixed or

determinable future time;

Certainty of time of payment An instrument is payable at a determinable futuretime which is expressed to be payable:a. At a fixed period after date or sight; orb. On or before a fixed or determinable future

time specified therein; orc. 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.

" After sight means after the drawee has seen

the NI upon presentment for acceptance." The event must necessarily happen. Ifconditional, not negotiable.

" An instrument payable upon a contingency isnot negotiable, and the happening of the eventdoes not cure the defect. (Sec. 4)

" A promise to pay “when able,” “as soon as Ican”, etc., without specification of an absolutedate is not negotiable. However, there is adifference of opinion as to whether it is aconditional promise or an absolute promise topay at an unreasonable time:a. Under the first view, negotiability is

destroyed both by the condition and bywant of a fixed time for payment;

b. Under the second view, by the generalprinciple that a promise to pay within areasonable time is not so certain as torender an instrument negotiable.

Aftersight Draft - payable only after the expirationof the stipulated period from acceptance (legalsight).

Acceleration Notes- provisions which make it possible for the makerto pay the NI at an earlier date or make it possible

for the holder to require payment of the NI at anearlier date.

1st Class – On or before a certain date

2nd

Class –a. renders whole debt due and demandable

upon failure of obligor to comply withcertain conditions ( Acceleration Clause)

b. Maker shall supply additional collateral incase of depreciation of the value of theoriginal deposit, and upon default, thenote shall become due.

c. Contains provisions for acceleration whereholder deems himself insecure (InsecurityClause)

Extension Clause- Clause in NI that extend the maturity dates. “Aninstrument is payable at a definite time if by itsterms it is payable at a definite time subject toextension at the option of the holder, or toextension to a further definite time at the option ofthe maker or acceptor or automatically upon orafter a specified act or event.” (Subsection 3-109(1)(d) of the Uniform Commercial Code of theUnited States; Aquino, Timoteo B., Notes andCases on Banking Law and NegotiableInstruments Law Vol. I, 2009, p. 50.)

- Different from Sec. 120(f)

When payable on demand (Sec. 7): a. When it is so expressed to be payable on

demand, or at sight, or on presentation; orb. In which no time for payment is

expressed.

Note: Where an instrument is issued, accepted, orindorsed when overdue, it is, as regards theperson so issuing, accepting, or indorsing it,payable on demand.

4. Payable to order or to bearer

When payable to order (Sec. 8) The instrument is drawn payable:

a. To the order of a specified person orb. To him or his order.

" The payee must be named or otherwiseindicated therein with reasonable certainty.

" It may be drawn payable to the order of:a. A payee who is not maker, drawer, or

drawee; orb. The drawer or maker; orc. The drawee; or

d. Two or more payees jointly (“AND”); ore. One or some of several payees (“OR”); orf. The holder of an office for the time being.

When payable to bearer (Sec. 9)a. When it is expressed to be so payable; orb. When it is payable to a person named

therein or bearer; orc. When it is payable to the order of a

fictitious or non-existing person, and suchfact was known to the person making it sopayable; or

d. When the name of the payee does notpurport to be the name of any person; or

e. When the only or last indorsement is anindorsement in blank.

Fictitious Payee Rule- If an actual, existing and living payee is not the

intended recipient of the proceeds of thecheck, the payee is considered a “fictitious”payee and the check is a bearer instrument.









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Hence, even if the signature of the payee wasforged, the collecting bank and drawee bankare relieved of liability.

- Theory: One cannot expect a fictitious payeeto indorse. Hence, the issuer must haveintended for the NI to be negotiated by meredelivery.

- The loss falls on the drawer.- Burden: The check is presumed to be an order

instrument and it is up to the person makingthe contrary allegation to prove otherwise.

(PNB v. Rodriguez , et al. G.R. No. 170325, 26September 2008)- In the US, the rule is used to counteract the

effect of forged indorsements on the right ofthe holder to enforce payment against thedrawer or maker.

- The rule intends to remove the group of casesinvolving a dishonest employee from thetradition “forged indorsement doctrine” and

imposes the loss on the employer who hiresand fails to properly control the dishonestagent, rather than on banks which collect andpay checks with forged indorsement.

- Bad Faith Exception: A showing of commercialbad faith on the part of the drawee bank, orany transferee will work to strip it of thisdefense.

5. Identification of the drawee" Where the instrument is addressed to a

drawee (meaning in a bill of exchange), hemust be named or otherwise indicated with

reasonable certainty. The holder must know towhom he should present it for acceptanceand/or payment; otherwise, the purpose ofnegotiable instrument as a tool in commercialdealings will be greatly hampered. (Revieweron Commercial Law, Sundiang and Aquino)

" A bill may be addressed to more than onedrawee jointly, whether they are partners ornot; but not to two or more drawees in thealternative or in succession. (Sec. 128 )

Factors that Determine Negotiability:

1. The whole instrument itself2. Only what appears on the face of theinstrument

3. Provisions of the NIL, Sec.1

Additional provisions not affectingnegotiability.General Rule: the instrument is non-negotiable if itcontains a promise or order to do any act inaddition to the payment of money.Test: If the promise would give rise to a cause ofaction for breach of contract if the additional act isnot done, the instrument is not negotiable.Exceptions:a. authorizes the sale of collateral securities in

case the instrument be not paid at maturity;b. authorizes a confession of judgment if the

instrument be not paid at maturity;c. waives the benefit of any law intended for the

advantage or protection of the obligor; or

d. gives the holder an election to requiresomething to be done in lieu of payment ofmoney.

! Confession of judgment – a writtenstatement signed by the defendant, settingforth the basis of liability and authorizing theentry of judgment thereon.! Kinds of confession of judgmenta. cognivit actionem – literally means “he has

confessed action”. It is a writtenconfession of action by the defendantacknowledging his indebtedness to theplaintiff after the action has been filed. It isgiven after the action is brought to saveexpenses.

b. relicta verificationem – literally means “hispleadings being abandoned.” It isconfession of judgment by withdrawal ofthe defense.

Note: However, warrants of attorney to confess judgment before action is begun, are notauthorized nor contemplated by our law. They arevoid as against public policy because: [i] theyenlarge the field for fraud; [ii] the promisorbargains away his right to a day in court; and [iii]the effect is to strikedown the right of appealaccorded by statute. The NIL does not sanctionnor validated any provision otherwise illegal.

Omissions and Provisions that do not affectNegotiability (Sec. 6 )

The validity and negotiable character of aninstrument are not affected by the fact that:a. it is not dated; orb. does not specify the value given, or that any

value had been given therefore; orc. does not specify the place where it is drawn or

the place where it is payable; ord. bears a seal; ore. designates a particular kind of current money

in which payment is to be made.

" if it is not dated, the instrument will beconsidered to be dated as of the time it was

issued.Cases where date is important :a. If necessary to fix the date of maturity of NIb. If NI is payable on demand – to determine

W/N the NI was presented within a reasonableperiod of time from issue/last negotiation

c. If NI is interest bearing

" consideration for the instrument is presumed.( Art. 154 NCC & Sec. 25 NIL)

" Sec. 73 specifies where presentment forpayment should be made when the place ofpayment is not specified

" In common law, a sealed instrument is notnegotiable & is governed contracts under seal

Rules of construction:a. Where the sum payable is expressed in words

and also in figures and there is a discrepancybetween the two, the sum denoted by thewords is the sum payable; but if the words are









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ambiguous or uncertain, reference may behad to the figures to fix the amount;

b. Where the instrument provides for thepayment of interest, without specifying thedate from which interest is to run, the interestruns from the date of the instrument, and if theinstrument is undated, from the issue thereof;

c. Where the instrument is not dated, it will beconsidered to be dated as of the time it wasissued;

d. Where there is a conflict between the writtenand printed provisions of the instrument, thewritten provisions prevail;

e. Where the instrument is so ambiguous thatthere is doubt whether it is a bill or note, theholder may treat it as either at his election;

f. Where a signature is so placed upon theinstrument that it is not clear in what capacitythe person making the same intended to sign,he is to be deemed an indorser;

g. Where an instrument containing the word "I promise to pay" is signed by two or morepersons, they are deemed to be jointly andseverally liable thereon.

Consideration" Presumption of consideration. - every

negotiable instrument is deemed prima facie to have been issued for a valuableconsideration; and every person whosesignature appears thereon to have become aparty thereto for value.

" Value - any consideration sufficient to support

a simple contract. An antecedent or pre-existing debt constitutes value; and is deemedsuch whether the instrument is payable ondemand or at a future time.

" Holder for value – one who has given avaluable consideration for the instrumentissued or negotiated to him.

• What constitutes holder for value:where value has at any time been givenfor the instrument, the holder is deemed aholder for value in respect to all partieswho become such prior to that time.

•

where the holder has a lien on theinstrument arising either from contract orby implication of law, he is deemed aholder for value to the extent of his lien.

" Effect of want of consideration: a matter ofdefense as against any person not a holder indue course; and partial failure of considerationis a defense pro tanto, whether the failure isan ascertained and liquidated amount orotherwise.

Absence of consideration – total lack of anyvalid consideration for the contract is only apersonal defense.

Failure of consideration – failure or refusal orone party to do, perform or comply with theconsideration agreed upon is also only apersonal defense.

III. TRANSFER AND NEGOTIATION

Types of transfers:1. Assignment - transfer of title to the instrument,

with the assignee generally taking only suchtitle as his assignor has, subject to alldefenses available against his assignor;

2. Negotiation - transfer of a negotiableinstrument from one person to another madein such a manner as to constitute thetransferee the holder thereof

3. By Operation of Law – such as by succession,by insolvency.

Distinctions between Negotiation andAssignment

NEGOTIATION ASSIGNMENT

1. Refers only tonegotiable

instruments;2. The transferee is a

holder;3. A holder in due

course is subjectonly to realdefenses;

4. A holder in duecourse may acquirea better right thanthat of a prior party

5. A general indorserwarrants the

solvency of priorparties;

6. An indorser is notliable unless therebe presentment andnotice of dishonor;

7. Negotiation isgoverned by the NIL.

1. Refers generally toan ordinary

contract;2. The transferee is an

assignee;3. An assignee is

subject to both realand personaldefenses;

4. Generally, anassignee merelysteps into the shoesof the assignor;

5. An assignor doesnot warrant the

solvency of priorparties unlessexpressly stipulatedor the insolvency isknown to him;

6. An assignor is liableeven without noticeof dishonor;

7. Governed by Arts.1624 to 1635 (onassignment ofcredits) of the Civil

Code.

Methods of negotiation1. Order Instrument –Indorsement AND Delivery.2. Bearer Instrument – Delivery only.

Indorsement - legal transaction effected by thewriting of one's own name at the:a. back of the instrument orb. upon a paper (allonge) attached thereto." General Rule: indorsement must be of the

entire instrument (but partial indorsement mayconstitute a valid assignment binding betweenthe parties).Exception: where instrument has been paid inpart, it may be indorsed as to the residue.

Negotiable: Pay to X AND Y; Pay to X OR YNot Negotiable: Pay to X P600 and to Y P400









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" Kinds of indorsement:a. Special - specifies the person to whom or

to whose order, the instrument is to bepayable (sec. 34)

b. Blank - specifies no indorsee:

• Instrument is payable to bearer and

may be negotiated by delivery (sec.34)

• May be converted to specialindorsement by writing over thesignature of indorser in blank anycontract consistent with character ofindorsement.

c. Restrictive - when the indorsement either:i. Prohibits further negotiation of the

instrument; orii. Constitutes the indorsee the agent of

the indorser; oriii. Vests the title in the indorsee in trust

for or to the use of some otherpersons. But mere absence of wordsimplying power to negotiate does notmake an indorsement restrictive.

! All subsequent indorsees acquire onlythe title of the first indorsee under therestrictive indorsement. (sec. 37)

d. Qualified - constitutes the indorser a mereassignor of the title to the instrument. (sec.38)

• made by adding to the indorser'ssignature words like "sans recourse,”“without recourse", "indorser notholden", "at the indorser's own risk",

etc.• The purpose of this kind of

indorsement is to transfer title withoutguaranteeing payment by the primaryparty.

• It does not mean, however, that thequalified indorser incurs no liability atall. The effect is merely to limit hisliability. He is liable for breach of iswarranties as an indorser under Sec.65. Thus, he is liable if the instrumentis dishonored by NON-ACCEPTANCEor NON-PAYMENT due to:

a. forgery;b. lack of good title to the instrument

indorsed;c. lack of capacity to contract on the

part of prior parties; ord. the fact that the instrument was

valueless or not valid at the timeof the indorsement which fact wasknown to him.

e. Conditional - right of the indorsee is madeto depend on the happening of acontingent event

• Party required to pay may disregard

the conditions.• This kind of indorsement has no effect

on the further negotiation of theinstrument. The party required to pay,if he chooses, may make payment,disregarding the condition withoutincurring any liability because he isexpressly authorized to do so underSec. 39. But the person who received

payment will hold the proceedssubject to the right of the conditionalindorser.

f. Absolute - one by which indorser bindshimself to pay:i. upon no other condition than failure of

prior parties to do so; andii. upon due notice to him of such failure.

g. Joint - indorsement of instrument payableto 2 or more persons; all must indorse inorder for the transaction to operate as anegotiation.

• Pay to X AND Y; Both must indorse

• Pay to X OR Y: any one

• Exceptions to the rule requiring jointindorsement:a. Where the payees or indorsees

are partners; andb. Where the payee or indorsee

indorsing has authority to indorsefor the others.

h. Irregular - a person who, not otherwise aparty to an instrument, places thereon hissignature in blank before delivery.

" Rules on Indorsements:

• Effect of transfer without indorsement:a. transfer vests in the transferee such title

as the transferor had therein (assignment),and

b. the right to have the indorsement of thetransferor.

# For the purpose of determiningwhether the transferee is a holder indue course, the negotiation takeseffect as of the time when theindorsement is actually made.

# Applicable only to order instruments

• Indorsement of a bearer instrument: where aninstrument, payable to bearer, is indorsedspecially, it may nevertheless be furthernegotiated by delivery; but the personindorsing specially is liable as indorser to onlysuch holders as make title through his

indorsement.Note: The rule only applies to originally bearerinstruments. If it is originally a BEARERinstrument, it will always be a BEARERinstrument. As opposed to an original orderinstrument becoming payable to bearer, if thesame is indorsed specially, it can NOLONGER be negotiated further by meredelivery, it has to be indorsed.

• Striking out indorsements: the holder mayat any time strike out any indorsement,which is not necessary to his title. The

indorser whose indorsement is struck outand all indorsers subsequent to him, arethereby relieved from liability on theinstrument.

# If the instrument is payable to bearer on itsface, then whether or not there areindorsements on the back of theinstrument would be immaterial to the titleof the bearer, who is presumptively the









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owner and holder by his mere possessionof such instrument. None of theindorsement would be necessary to it’stitle since mere delivery would have beensufficient to transfer title from one holderto another.

# Where the instrument is payable to order on its face, the situation is different. First,the indorsement of a special indorsee isnecessary for the further negotiation of theinstrument. Second, the last indorsementcontrols the method of further negotiation.

• When prior party (reacquirer) may negotiate: where an instrument is negotiated back to aprior party, such party may reissue and furthernegotiate the same. But he is not entitled toenforce payment thereof against anyintervening party to whom he was personallyliable.# In the following cases, a prior party cannot

further negotiate the instrument:1. Where it is payable to the order of a

third person, and has been paid by thedrawer;

2. Where it was made or accepted foraccommodation and has been paid bythe party accommodated;

3. In other cases, where the instrumentis discharged when acquired by aprior party.

IV. HOLDERS

Classes of holders:1. simple holder (sec. 51)2. holder for value (sec. 26)3. holder in due course (sec.52, 57)

Holder in Due Course (1996, 1998, 2000 BarExams) A holder who has taken the instrument under thefollowing conditions:a. That it is complete and regular upon its face;b. That he became the holder of it before it was

overdue, and without notice that it has beenpreviously dishonored, if such was the fact;

c. That he took it in good faith and for value;d. That at the time it was negotiated to him, hehad no notice of any infirmity in the instrumentor defect in the title of the person negotiatingit.

" When title defective - The title of a personwho negotiates an instrument is defectivewhen he:I. obtained the instrument or any signature

thereto, by/for (manner of acquisition):a. fraudb. duress, or force and fearc. other unlawful meansd. illegal consideration

II. negotiates the NI (manner of negotiation)e. in breach of faithf. under such circumstances amounting

to fraud.

" What constitutes notice of defect. - Theperson to whom it is negotiated must have:

a. actual knowledge of the infirmity ordefect, or

b. knowledge of such facts that hisaction in taking the instrumentamounted to bad faith. (sec. 56)

" Notice before full amount is paid - wherethe transferee receives notice of any infirmityin the instrument or defect in the title of theperson negotiating the same before he haspaid the full amount agreed to be paid, he willbe deemed a holder in due course only to theextent of the amount paid by him.

" When person not deemed a holder in duecourse - where an instrument payable ondemand is negotiated on an unreasonablelength of time after its issue, the holder is notdeemed a holder in due course.

• Reasonable time, what constitutes. -regard is to be had to the

a. nature of the instrument,

b. the usage of trade or businesswith respect to such instruments,and the

c. facts of the particular case.

• Effect: in the hands of any holder otherthan a holder in due course, a negotiableinstrument is subject to the samedefenses as if it were non-negotiable

" General Rule: every HOLDER is deemedprima facie to be a holder in due course. Butholder must prove first that he is a holder.Exception: when it is shown that the title of

any person who has negotiated the instrumentwas defective, the burden is on the holder toprove that he or some person under whom heclaims acquired the title as holder in duecourse (shifting of burden of proof).Limitation: the last-mentioned rule does notapply in favor of a party who became boundon the instrument prior to the acquisition ofsuch defective title (Burden not Shifted) (Sec.59).

" Rights of a holder in due course:a. he may sue on the instrument in his own

name;

b. he may receive payment and if payment isin due course, the instrument isdischarged.

c. holds the instrument free from any defectof title of prior parties,

d. holds the instrument free from defensesavailable to prior parties amongthemselves, and

e. may enforce payment of the instrument forthe full amount thereof against all partiesliable thereon.

" Payment in due course is payment made: a. at or after the maturity of the instrumentb. to the holder thereofc. in good faith and without notice that his

title is defective.

" Shelter Rule: a. A HNIDC who derives his title from a

HIDC, AND









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b. who is not himself a party to any fraud orillegality affecting the instrument, has allthe rights of such former holder in respectof all parties prior to the latter.

" Rights of a Holder NOT in Due Course1. He may sue on the instrument in his

own name;2. He may receive payment and if the

payment is in due course, theinstrument is discharged;

3. He is entitled to the instrument butholds it subject to the same defensesas if it were non-negotiable; and

4. He has all the rights of the holder indue course from whom he derived histitle in respect of all parties prior tosuch holder, provided he is not himselfa party to any fraud or illegalityaffecting the instrument.

Can a finance company be a HIDC?

No – Consolidated Plywood & Industries, Inc. v.IFC Leasing and Acceptance Corporation, 149SCRA 448 (1987)

Yes – Juanita Salas v. CA, 181 SCRA 296 (1990)

No – Great Asian Sales Center Corporation v.Court of Appeals, G.R. No. 105774, 25 April 2002(The SC said the solution is for FC to make theconsumer sign a separate contract and to enforce

the obligation based on contract instead of the NI)

(Effectively) No – Art. 146, RA 7394 (Consumer Act, 1992), at least insofar as consumer loans areconcerned

“ARTICLE 146. Sale of ConsumerProducts On Installment Payment . — In aconsumer credit sale other than one pursuant toan open-end credit plan, the obligation of theconsumer to whom credit is being extended shallbe evidenced by a single instrument which shallinclude, in addition to the disclosures required by

this act, the signature of the seller and the personto whom credit is extended, the date it was signed,a description of the property sold and a descriptionof any property transferred as a trade-in. Theinstrument evidencing the credit shall contain aclear and conspicuous typewritten notice to theperson to whom credit is being extended that:

“a) he should not sign the instrument if itcontains any blank space;

“b) he is entitled to a reasonable return of theprecomputed finance charge if the balance isprepaid; and

“c) he is entitled to an exact, true copy of theagreement.

“In cases where the instrument will be soldat a discount to a bank, financing company orother lender, the said transferee shall besubject to all claims and defenses which thedebtor could assert against the seller ofconsumer products obtained hereto or with theproceeds thereof.” (emphasis supplied.)

“ARTICLE 4. Definition of Terms. — Forpurposes of this Act, the term:

“xxx xxx xxx

“n) ‘Consumer’ means a natural person whois a purchaser, lessee, recipient or prospectivepurchaser, lessor or recipient of consumerproducts, services or credit.

“o) ‘Consumer credit’ means any creditextended by a creditor to a consumer for the saleor lease of any consumer product or service underwhich part or all of the price or payment therefor ispayable at some future time, whether in full or ininstallments.

“xxx xxx xxx

“q) ‘Consumer products and services’ meansgoods, services and credits, debts or obligations

which are primarily for personal, family, householdor agricultural purposes, which shall include butnot limited to food, drugs, cosmetics, and devices.

“xxx xxx xxx

“s) "Consumer transaction" means (1) (i) asale, lease, assignment, award by chance, orother disposition of consumer products, includingchattels that are intended to be affixed to land, orof services, or of any right, title, or interest therein,except securities as defined in the Securities Actand contracts of insurance under the Insurance

Code, or (ii) a grant of provision of credit to aconsumer for purposes that are primarily personal,family, household or agricultural, or (2) asolicitation or promotion by a supplier with respectto a transaction referred to in clause (1).”

V. LIABILITIES OF PARTIES

Persons primarily liable on instrument: theperson who, by the terms of the instrument, isabsolutely required to pay the same. All otherparties are "secondarily" liable.

LIABILITY WARRANTY1. Conditioned on

presentment &notice of dishonor.

1. Not conditioned.

2. Action accrues onlyupon maturity/dishonor.

2. Action accruesonce there isbreach.

1. Parties Primarily Liablea. Maker (Sec. 60)

• engages to pay according to the tenorof the instrument; and

• admits the existence of the payee andhis then capacity to indorse at the timeof the making of the note.

• A person placing his name on the faceof a note is prima facie a maker andliable as such; and he is presumed tohave acted with care and to havesigned the instrument with fullknowledge of its contents.









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b. Acceptor (Sec. 62)

• engages to pay according to the tenorof his acceptance;

• admits:1. the existence of the drawer,

2. the genuineness of his signatureand3. his capacity and authority to draw

the instrument; and4. the existence of the payee and his

then capacity to indorse.

Important: The drawee is not liable to thepayee or holder until he accepts theinstrument, or certifies the check (Secs.127 & 189).

Exception: In HSBC v. Catalan, 440SCRA 498 (2004), the Supreme Courtruled that although the payee may not suethe drawee based on the check, the payeemay sue the drawee based on tort under Art. 19 of the NCC. The payee may suefor abuse of right so long as he can prove:(a) that there is a legal right or duty; (b)which is exercised in bad faith; and (c) forthe sole intent of prejudicing or injuringanother. According to the Supreme Court,the allegations in Catalan’s amendedcomplaint warrant an action for tort,particularly:a. the unwarranted failure of the bank to

pay the checks despite the repeatedassurance of the drawer as to theauthenticity of the checks andfrequent directives to pay the valuethereof to Catalan; and

b. the bank failed to inform the payee ofthe reasons for its continued inactionand non-payment.

Note: The bank was not sued on the valueof the checks, but for how it acted inrelation to Catalan’s claim for payment.

• Acceptor admits the genuineness of

drawer’s signature, not indorsers’.• Where a check is certified by a bank, it

is equivalent to an acceptance. Sincecertification is equivalent to acceptance,a bank which has certified a checkwhether at the request of the holder orof a drawer, has the same liabilities andmakes the same warranties as anacceptor. It cannot, after certification,question the genuineness of thedrawer’s signature. If it discovers thatsuch signature is forged subsequent tocertification but prior to payment, it

cannot refuse to pay on the check. If itsdiscovery comes after it has paid thecheck, it cannot recover back what itpaid on the ground of mistaken paymentunless the holder is guilty of fraud ornegligence.

• If a drawee-bank accepts or pays acheck despite a stop payment orderfrom the drawer, through oversight or

otherwise, it cannot refuse to pay theholder or recover what has been paid;neither may it debit the drawer’s accountunless the acceptance or payment wasmade prior to the receipt of the order.

• The liabilities of an acceptor applies to a

drawee who pays without accepting theinstrument.

2. Parties Secondarily Liablea. Drawer (Sec. 61)

• admits the existence of the payee andhis capacity to indorse;

• engages that the instrument will beaccepted or paid or both according toits tenor; and

• engages that if the instrument isdishonored and proper proceedingsare brought, he will pay to the partyentitled to be paid.

b. General Indorser (Sec. 66)

• Warrants:1. genuineness of the instrument;2. his good title to it;3. capacity to contract of prior

parties; and4. instrument is valid and subsisting.

• engages that the instrument will beaccepted or paid or both according toits tenor; and

• engages that if the instrument isdishonored and proper proceedingsare taken, he will pay to the partyentitled to be paid.

c. Irregular Indorser – a person, nototherwise a party to an instrument, placeshis signature thereon in blank beforedelivery.Rules:

• If instrument payable to the order of a3

rd person, he is liable to the payee

and subsequent parties.

• If instrument payable to order ofmaker or drawer, he is liable to all

parties subsequent to the maker ordrawer.

• If he signs for accommodation of thepayee, he is liable to all partiessubsequent to the payee.

d. Acceptor for Honor

GENERALINDORSER

IRREGULARINDORSER

1. Makes either ablank or specialindorsement;

2. Indorses theinstrument after itsdelivery to the payee;3. Liable only toparties subsequent tohim

1. Always makes ablank indorsement;

2. Indorses before itsdelivery;

3. Liable to the payeeand subsequentparties unless he signsfor the accommodationof the payee in whichcase he is liable only









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to all partiessubsequent to thepayee.

3. Parties with Limited Liability (sec. 65;Metropol Financing v. Sambok, 120 SCRA

864)c. Qualified Indorser - warrants that:# instrument is genuine and in all

respects what it purports to be;# he has good title to it;# all prior parties had capacity to

contract;# he has no knowledge of any fact

which would impair the validity of theinstrument or render it valueless.

d. Persons Negotiating by Delivery# warranties same as those of qualified

indorsers, but extend to immediate

transferee only.

Negotiating by Meredelivery or by QualifiedIndorsement

General Indorser

1. No secondary liability; 1. With secondaryliability;

2. Warrants that he hasno knowledge of anyfact, which wouldimpair the validity ofthe instrument orrender it valueless.

2. Warrants thatthe instrument is,at the time of hisindorsement,valid andsubsisting.

4. Other parties who may be liable

General Rule: One whose signature does notappear on the instrument shall not be liablethereon (Sec. 18).

Parties who may be liable although his signaturedoes not appear on the NI:1. The principal who signs through an agent2. One who signs his assumed or trade name is

liable3. The forger

4. Persons whose signatures were forged, butare precluded from setting up the defense offorgery

5. One who indorses in a separate instrument(allonge)

6. A person negotiating by delivery (as in thecase of a bearer instrument) is liable to hisimmediate indorsee.

7. In the case of constructive acceptance

Parties who are not liable although his signatureappear on the NI: 1. Persons covered by Sec. 15 (Incomplete and

undelivered NI)2. Minor or incapacitated persons3. Agent4. Person whose signature was forged.

Requisites for an Agent to escape liability:1. must be duly authorized;

2. add words to his signature indicating that hesigns as an agent, that is, for or on behalf of aprincipal, or in a representative capacity; and

3. disclose his principal.

" A signature by “procuration” operates asnotice that the agent has but a limitedauthority to sign, and the principal is boundonly in case the agent in so signing actedwithin the actual limits of his authority. (sec.21)

" Indorsement or assignment of the NI by acorporation or by an infant passes the propertytherein, notwithstanding that from want ofcapacity, the corporation or infant may incurno liability thereon. (sec. 22)

Accomodation Party (1996, 1998, 2005 BarExams)One who has signed the instrument as maker,

drawer, acceptor, or indorser, without receivingvalue therefor, and for the purpose of lending hisname to some other person." Can receive payment for lending his name." Indorser must lend his name to the maker, and

not to the holder (Maulini v. Serrano, 28 Phil.640)

" Liability: such a person is liable on theinstrument to a holder for value,notwithstanding such holder, at the time oftaking the instrument, knew him to be only anaccommodation party.

" Effects:

1. accommodation party is generallyregarded as a surety for the partyaccommodated;

2. When accommodation party makespayment to holder of the note, he has theright to sue the accommodated party forreimbursement.

" Rights of accommodation parties as againsteach other: the other may demandcontribution from his co-accommodation partywithout first directing his action against theprincipal debtor provided:

1. he made the payment by virtue of judicialdemand; or2. the principal debtor is insolvent.(Sadaya v. Sevilla, 19 SCRA 924; Art. 2073,NCC)

Note: A corporation cannot act as anaccommodation party. The issuance orindorsement of negotiable instrument by acorporation without consideration and for theaccommodation of another is ultra vires.(Crisologo v. CA, 117 SCRA 594).

Order of liability of indorsers:1. among themselves – indorsers are liable

prima facie in the order in which they indorse;but evidence is admissible to show that, asbetween or among themselves, they haveagreed otherwise (sec. 68)

2. The holder – indorsers are liable in any order









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VI. DEFENSES

1. Real/Absolute Defenses - those that attach tothe instrument itself and are available againstall holders, whether in due course or not.Examples:1. Alteration2. Non-delivery of incomplete instrument3. Duress amounting to forgery (when

signature is acquired by duress)4. Fraud in factum or fraud in esse

contractus5. Minority6. Marriage in the case of a wife7. Insanity where the insane person has a

guardian appointed by the court (Ogden)8. Ultra vires acts of a corporation, where the

corporation is absolutely prohibited by itscharter or statute from issuing anycommercial paper under any

circumstances (Foreign case)9. Want of authority of agent10. Execution of instrument between public

enemies (Ogden)11. Illegality of contract where it is the contract

or instrument itself which is expresslymade illegal by statute

12. Forgery13. Prescription14. Discharge in insolvency

2. Personal/Equitable Defenses – those whichare available only against a person not a

holder in due course or a subsequent holderwho stands in privity with him.Examples:1. Absence or failure of consideration2. Want of delivery of complete instrument3. Insertion of wrong date in an instrument,

where it is payable at a fixed period afterdate and it is issued undated or where it ispayable at a fixed period after sight andthe acceptance is undated

4. Filling up of blank contrary to authoritygiven or not within reasonable time, wherethe instrument is delivered

5. Fraud in inducement6. Acquisition of instrument by force, duress,or fear

7. Acquisition of the instrument by unlawfulmeans

8. Acquisition of the instrument for an illegalconsideration

9. Negotiation in breach of faith10. Negotiation under circumstances that

amount to fraud11. Mistake12. Intoxication (according to better authority);13. Ultra vires acts of corporations where the

corporation has the power to issuenegotiable paper but the issuance was notauthorized for the particular purpose forwhich it was issued

14. Want of authority of agent where he hasapparent authority

15. Insanity where there is no notice ofinsanity on the part of the one contractingwith the insane person

16. Illegality of contract where the form orconsideration is illegal

" Defenses available to solidary debtor (Art.1222, NCC): a. Those derived from the nature of the

obligationb. Those that are personal to himc. Those that personally belong to the others

(partial defense)

" Fraud in factum v. Fraud in inducement

" Effects of Defenses:

1. Minority if a real defense, but personal to theminor

2. Incomplete but delivered instrument (Sec. 14;1997, 2004 Bar Exams)

• Situations contemplated:a. Where the instrument is wanting in

any material particular, the person inpossession thereof has a prima facie authority to complete it by filling up theblanks therein. Material particular:those that can or cannot affectnegotiability

b. A signature on a blank paperdelivered by the person making thesignature in order that the paper maybe converted into a NI operates as a prima facie authority to fill it up as

such for any amount• To hold parties prior to completion liable

by a HNIDC: NI must be filled up strictly inaccordance with the authority given ANDwithin a reasonable time

• If requisites not met, can HNIDC enforcethe NI against a party prior to completion?b. No (better view)c. Yes, according to authorized tenor

• if any such instrument, after completion, isnegotiated to a HIDC, it is valid andeffectual for all purposes in his hands, andhe may enforce it as if it had been filled up

strictly in accordance with the authoritygiven and within a reasonable time

3. Incomplete and undelivered instrument (Sec.15)

• it will not, if completed and negotiatedwithout authority, be a valid contract in thehands of ANY holder, as against anyperson whose signature was placedthereon BEFORE delivery.

• However, subsequent indorsers are liable.

• In the hands of a HIDC, there is primafacie presumption of delivery

4. Complete and undelivered instrument (Sec.16)

• as between immediate parties and asregards a remote party other than a holderin due course, the delivery must beauthorized in order to be effectual

• “Immediate” means privity, not proximity









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• As against a HNIDC, it may be provedthat:a. No delivery was madeb. Delivery was not authorizedc. Delivery was conditional or for a

special purpose

Rules on delivery of NI (Sec. 15 & 16)1. Delivery is essential to the validity of any NI2. Delivery must have been with the intention of

passing title3. An incomplete and undelivered NI is invalid as

to any party before delivery in the hands of ANY holder, even a HIDC

4. NI mentioned in #3, there is prima facie presumption of delivery (if HIDC)

5. Delivery to the agent is sufficient (if HIDC)6. There is a prima facie presumption of delivery

of a complete NI (if HNIDC)7. There is conclusive presumption of delivery of

a complete instrument (if HIDC)8. Delivery of the NI may be made on a parol

condition or for a special purpose (only againsta HNIDC)

5. Prescription

• Under the NCC, 10 years from accrual ofthe cause of action

• In the case of checks, the action of thedepositor against his drawee bankcommences to run from the time he isgiven notice of payment (PCIB v. CA, 350SCRA 446 [2001])

• In Papa v. Valencia, 284 SCRA 643(1998), the SC said that the failure of thepayee to encash the check for more than10 years ”undoubtedly resulted in theimpairment of the check through hisunreasonable and unexplained delay.”This is contrary to NAMARCO v. F.U.N.D.,49 SCRA 238 (1973) where it was heldthat the rule that delivery of a mercantiledocument shall produce the effect ofpayment when impaired by the creditor’sfault has no application to a check issuedby the debtor himself. There will be no

prejudice to the drawer-debtor because heis supposed to maintain his funds in hisaccount. Nonetheless, it is submitted thatthe SC could have arrived at the sameconclusion reached in the Papa Case if itrelied on prescription.

6. Alteration (1995, 1996, 1999 Bar Exams)

• The instrument is avoided

• Exceptions:1. against a party who has himself made,

authorized, or assented to thealteration

2. subsequent indorsers3. holder in due course not a party to thealteration - he may enforce paymentaccording to its original tenor

• Changes constituting material alteration:a. date;b. sum payable, either for principal or

interest;c. time or place of payment

d. number or relations of the parties;e. medium or currency in which payment

is to be made;f. that which adds a place of payment

where no place of payment isspecified; and

g. any other change or addition whichalters the effect of the instrument inany respect.

Note: a material alteration is one that altersthe effect of the instrument; one whichchanges the items required to be stated underSec. 1, NIL.

• Spoliation – alteration made by a strangerto the instrument. Sec. 124 is the American doctrine of spoliation.

• The general rule denies the draweebank’s right to charge against the drawer’saccount the amount of an altered check.However, the latter’s negligence, before orafter the alteration, may estop him fromsetting such alteration as against aninnocent drawee bank who has paid thecheck.

Note: Alteration is only a partial real defensebecause a holder in due course can stillenforce it according to its original tenor.

Original Tenor is altered before acceptance

1st View: Altered tenor is tenor of acceptance2

nd View: Original tenor is tenor of acceptance.

Acceptance is the signification by the draweeof his assent to the order of the drawer. Theorder of the drawer is the original tenor, notthe altered tenor. What “tenor of hisacceptance” means is whether the same isgeneral or qualified acceptance (Sec. 139).

FEBTC v. Gold Palace Jewelry Co., 562SCRA 604 (2008) The collecting bank cannot debit the accountof the payee who is a holder in due course if

the collecting bank returned the amount of thealtered check to the drawee bank. It is thedrawee bank that should bear the loss. Ifcollecting bank reimbursed the drawee bank, itis considered as acting on its own because:- Payment of check by the drawee includes

acceptance under Sec. 62, NIL.- Tenor of acceptance is determined by the

terms of the bill as it is when the draweeaccepts.

- HIDC who relied on the drawee’s clearanceand payment is protected by Sec. 62.

- Drawee, compared to the HIDC, is in abetter position to verify with the drawer thematters stated in the bill.

- The view in common law that drawee bankmay recover from the person to whompayment was made by mistake is notapplicable since our laws have no similarprovision.

- The principal-agent relationship between thepayee and collecting bank had ceased.









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- The collecting bank cannot be considered tohave acted as representative of the draweebank when it debited payee’s account.

- The collecting bank cannot invoke thewarranty of payee who indorsed the NI forcollection since it’s restrictive under Sec. 36(no transfer of title to collecting bank). Thewarranties under Sec. 66 are based upon atransfer of title.

Comments on the FEBTC Case- The protection of a HIDC should be in

accordance with Sec. 124; hence, entitled tothe original amount.

- When the collecting bank returned theamount to the drawee bank, it was not amere voluntary act, but dictated by law and jurisprudence. The obligation of thecollecting bank is based on the doctrine thatit has warranties of a general indorser, and

Rules of the Philippines Clearing HouseCorporation and BSP Supplementary Ruleson Regional Clearing.

- The warranties of the collecting bank, asagent of the payee, extends in favor of thedrawee. The act of the agent is the act of theprincipal.

- The principal will not escape liability upontermination of the principal-agentrelationship for acts done when the agencywas still in existence.

- There are SC decisions that support theview that the payee will shoulder the loss

since he has the same warranties of ageneral indorser.

- Payment by mistake is recognized under Art. 2154, NCC (solutio indebiti ).

(Aquino, Timoteo B., Notes and Cases onBanking Law and Negotiable Instruments Law,Vol. I, 2014.)

7. Forgery (1995, 2006, 2010 Bar Exams)

• Effects:1. signature is wholly inoperative2. no right to retain the instrument, or to

give a discharge therefor, or toenforce payment thereof against anyparty thereto, can be acquired throughor under such signature

3. Some parties are precluded fromsetting up the defense of forgery

• Extent of Effects:1. Only the forged signature is

inoperative, not the NI, not thegenuine ones

2. The NI can be enforced by holderswhose title does not depend on theforged signature (bearer instruments)

3. Can be enforced against those whoare precluded from setting up theforgery, like:a. Those who by their acts, silence,

or negligence, are estopped fromsetting up the defense of forgery

b. Those who warrant or admit thegenuineness of the signature in

question. These include acts oromissions that amount toratification, express or implied(indorser, acceptor, personnegotiating by mere delivery.

Note: Persons precluded from setting up thedefense of forgery may still recover damagesunder the NCC provisions on quasi-delicts.

Cut-Off RuleGeneral Rule: Parties prior to the forgedsignature are cut-off from the parties after theforgery in the sense that prior parties cannotbe held liable and can raise the defense offorgery. The holder can only enforce theinstrument against parties who became suchafter the forgery.Exception: When the prior parties areprecluded from setting up the defense offorgery.

Forgery of Indorsement

A. PN payable to order- The party whose signature was forged

and parties prior to him are not liable

B. PN or Bill payable to bearer- Only the person whose signature was

forged can raise forgery- To HIDC: Liable. Indorsement is not

necessary to pass title- To HNIDC: Not liable. Defense is want

of delivery of a mechanically completeinstrument (the instrument must becomplete before the forgery)

C. Bill Payable to order- Drawee cannot charge the account of

the drawer- Drawer cannot recover from the

collecting bank- Drawee can recover from the collecting

bank (BUT if it is the drawer’s signaturewhich was forged, drawee cannotrecover from the collecting bank)

- Payee can recover from the drawer- Payee can recover from recipient ofpayment

- Payee cannot recover from the drawee- Collecting bank bear’s the risk of loss,

but can recover from the person towhom it is paid

Forgery of Drawer’s Signature- Drawee bank that paid is liable. It

cannot go after the collecting bank.Recourse is against the forger

Double Intent in Fraudulent Impersonation1. Maker or drawer intends to make the

instrument payable to the personbefore him

2. He intends to make the instrumentpayable to the person whom hebelieves the stranger to be.

Note: The 1st is not forgery, but signature

of an assumed name.









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• Loss is thrown upon the issuer:1. Theory of actual intent2. Theory of estoppel/negligence

VII. PRESENTMENT FOR PAYMENT

Presentment for payment – the presentation ofan instrument to the person primarily liable for thepurpose of demanding and receiving payment.

General Rules:

• presentment for payment is not necessary tocharge persons primarily liable

• presentment for payment is necessary tocharge persons secondarily liable; otherwise,they are discharged.

Exceptions:a. drawer - where he has no right to expect or

require that the drawee or acceptor will paythe instrument (sec. 79)

b. indorser - where the instrument was made oraccepted for his accommodation and he hasno reason to expect that the instrument will bepaid if presented.

c. when dispensed:- where, after the exercise of reasonable

diligence, presentment as required cannotbe made;

- where the drawee is a fictitious person;- by waiver of presentment, express or

implied. (sec. 82)d. when the instrument has been dishonored by

non-acceptance (sec. 151)

Sufficiency of presentmentIt must be:1. made by the holder or any person authorized

to receive payment on his behalf;2. at a reasonable hour on a business day;3. at a proper place;4. to the person primarily liable or if he is absent

or inaccessible, to any person found at theplace where the presentment is made.

How made:1. personal demand for payment at the proper

place; and2. readiness to exhibit the instrument if required,

and to receive payment and to surrender theinstrument if the debtor is willing to pay.

• Purpose of exhibition: To enable thedebtor to: 1. determine the genuineness of the

instrument and the right of the holderto receive payment; and

2. to enable him to reclaim possession

upon payment.

• When exhibition excused:1. when debtor does not demand to see

the instrument but refuses payment onsome other grounds, and

2. when the instrument is lost ordestroyed.

When made:

• where the instrument is payable at a fixed ordeterminable future time, presentment mustbe made on the day it falls due

• where it is payable on demand:a. promissory note: presentment must be

made within a reasonable time after itsISSUEb. bill of exchange: presentment for payment

will be sufficient if made within areasonable time after the LASTNEGOTIATION thereof

• a check must be presented for payment withina reasonable time after its issue or the drawerwill be discharged from liability thereon to theextent of the loss caused by the delay (butindorsers are discharged W/N they sufferedany loss).

Time of maturity:

• every negotiable instrument is payable at thetime fixed therein without grace

• when the day of maturity falls upon a Sundayor a holiday, the instruments are to bepresented for payment on the next succeedingbusiness day

• when the day of maturity falls upon aSaturday:! Instrument is payable at a fixed or

determinable future time (time instrument)- presented for payment is on the nextsucceeding business day

! instrument is payable on demand - at the

option of the holder, be presented forpayment:a. before 12:00 noon on Saturday when

that entire day is not a holiday orb. the next succeeding business day.

How computed:! excluding the day from which the time is to

begin to run, and by including the date ofpayment

! applies to instruments which are payableat a fixed period after date, after sight, orafter that happening of a specified event.

Proper place for presentment (In order):a. Where a place of payment is specified in the

instrument and it is there presented;b. Where no place of payment is specified but

the address of the person to make payment isgiven in the instrument and it is therepresented;

c. Where no place of payment is specified andno address is given and the instrument ispresented at the usual place of business orresidence of the person to make payment;

d. In any other case if presented to the person tomake payment wherever he can be found, or if

presented at his last known place of businessor residence.

When delay in presentment excused – delay iscaused by circumstances beyond the control ofthe holder and not imputable to his default,misconduct, or negligence. When the cause ofdelay ceases to operate, presentment must bemade with reasonable diligence.









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Principal debtor is dead (Sec. 76)

• Must be made to his Executor or administratorif there be one and can be found. Otherwisepresentment is excused

Persons liable as partners (Sec. 77)• To any one of them, even if there’s dissolution

• Mutual agency principle

Joint Debtor (Sec 78)

• To all of them. They are not partners

• Except: when one is authorized

Note: Sec. 76-78 do not apply if there is a placespecified.

VIII. PRESENTMENT FOR ACCEPTANCE

Presentment for acceptance – the production orexhibition of a bill of exchange to the drawee forhis acceptance

General Rule: presentment for acceptance is notnecessary to render any party to the bill liable.

Exception: presentment for acceptance must bemade:a. Where the bill is payable after sight, or where

presentment for acceptance is necessary inorder to fix the maturity of the instrument; or

b. Where the bill expressly stipulates that it shallbe presented for acceptance; or

c. Where the bill is drawn payable elsewhere,than at the residence or place of business ofthe drawee. (Sec. 143)

Note: in all the above cases, the holder musteither present the bill for acceptance or negotiate itwithin a reasonable time; otherwise, the drawerand all indorsers are discharged.

How made:1. made by or on behalf of the holder;2. at a reasonable hour;3. on a business day;4. before the bill is overdue and within

reasonable time;5. to the drawee or some person authorized to

accept or refuse acceptance on his behalf.

If addressed to 2 or more drawees: - Must be made to all of them, except:

a. They are partnersb. One is authorized

Where drawee is dead - to his personal representative- merely permissive (under Sec. 148,

presentment is excused)

Drawee adjudged insolvent :- To him, or to his trustee or assignee

Days presentment may be made. If date ofpresentment is:a. Sunday or a holiday – must be made on the

next succeeding business day

b. Saturday – before 12:00 noon on Saturdayprovided that it is not a holiday.

(In Sec 146, presentment on a Saturday is notlimited to demand NI, unlike in Sec. 85)

When delay for presentment excused:- A bill is drawn payable elsewhere than at theplace of business or the residence of the drawee,and holder has no time, with the exercise ofreasonable diligence, to present the bill foracceptance before presenting it for payment onthe day that it falls due.Effect: does not discharge the drawers andindorsers.

Where presentment is excused:a. Where the drawee is dead, or has absconded,

or is a fictitious person or a person not havingcapacity to contract by bill

b. Where presentment can not be made after the

exercise of reasonable diligencec. Where, although presentment has been

irregular, acceptance has been refused onsome other ground.

Note: bill may be treated as dishonored by non-acceptance.

Duty of holder where bill not accepted. - wherea bill is duly presented for acceptance and is notaccepted within the prescribed time (24 hours –Sec. 136), the person presenting it must treat thebill as dishonored by non-acceptance or he losesthe right of recourse against the drawer and

indorsers (Sec. 150).

Right of holder where bill not accepted- an immediate right of recourse against the

drawer and indorsers accrues to the holderand no presentment for payment is necessary

- No need to wait for maturity date

IX. ACCEPTANCE

Acceptance: the signification by the drawee of hisassent to the order of the drawer.

How made :1. must be in writing2. signed by the drawee3. must not express that the drawee will perform

his promise by any other means than thepayment of money.

• the holder of the bill presenting the same foracceptance may require that the acceptancebe written on the bill, and if such request isrefused, may treat the bill as dishonored.

• where an acceptance is written on a paperother than the bill itself, it does not bind theacceptor except in favor of a person to whomit is shown and who, on the faith thereof,receives the bill for value.

Period for drawee to accept - 24 hours afterpresentment in which to decide whether or not hewill accept the bill; if acceptance is given, it datesas of the day of presentation (Sec. 136).









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Constructive/Implied acceptance 1. If the drawee destroys the instrument2. Where the drawee refuses to return the bill

accepted or non-accepted to the holder within24 hours after delivery, or within such otherperiod as the holder may allow (Sec. 137)- Drawee must return NI if holder demandseven within 24 hours.

Reconcile Sec 136, 137 and 150

Kinds:1. General - assents without qualification to the

order of the drawer.2. Qualified - which in express terms varies the

effect of the bill as drawn.a. Conditional - makes payment by the

acceptor dependent on the fulfillment ofa condition therein stated.

b. Partial - an acceptance to pay part only of

the amount for which the bill is drawn.c. Local - an acceptance to pay only at a

particular placed. Qualified as to timee. The acceptance of some one or more of

the drawees but not of all.3. Constructive

Rights of parties as to qualified acceptance.

• Holder : he may refuse to take a qualifiedacceptance and if he does not obtain anunqualified acceptance, he may treat the billas dishonored by non-acceptance.

• Drawer or indorser : when he receives noticeof a qualified acceptance, he must, within areasonable time, express his dissent to theholder or he will be deemed to have assentedthereto (implied assent).

Effect of taking a qualified acceptance: thedrawer and indorsers are discharged from liabilityon the bill unless they have expressly or impliedlyauthorized the holder to take a qualifiedacceptance, or subsequently assent thereto.

Other rules on acceptance:

• a bill may be accepted before it has been

signed by the drawer, or while otherwiseincomplete, or when it is overdue, or after ithas been dishonored by a previous refusal toaccept, or by non payment

• when a bill payable after sight is dishonoredby non-acceptance and the draweesubsequently accepts it, the holder, in theabsence of any different agreement, is entitledto have the bill accepted as of the date of thefirst presentment

• an unconditional promise in writing to accept abill before it is drawn is deemed an actual

acceptance in favor of every person who,upon the faith thereof, receives the bill forvalue

• where a check is certified by the bank onwhich it is drawn, the certification is equivalentto an acceptance

Acceptance for Honor - an undertaking by astranger to a bill after protest for the benefit of any

party liable thereon or for the honor of the personfor whose account the bill is drawn whichacceptance inures also to the benefit of all partiessubsequent to the person for whose honor it isaccepted, and conditioned to pay the bill when itbecomes due if the original drawee does not payit.! Requisites:

1. the bill must have been protested fordishonor by non-acceptance or for bettersecurity;

2. the acceptor for honor must be a strangerand not a party already liable on theinstrument;

3. bill must not be overdue;4. acceptance for honor must be with the

consent of the holder of the instrument.! Formalities:

1. must be in writing;2. must indicate that it is an acceptance for

honor;3. signed by the acceptor for honor;4. must contain an express or implied

promise to pay money;5. the accepted bill for honor must be

delivered to the holder.

! When the acceptance for honor does notexpressly state for whose honor it is made, itis deemed to be an acceptance for the honorof the drawer.

! Acceptor for honor is liable to the holder & allparties subsequent to the party for whose

honor the acceptor has accepted.! Liability: SECONDARY. He agrees to pay if:

a. Presentment for payment is madeb. Drawee does not payc. Bill is protested for non-paymentd. Notice of dishonor is given to him

! The maturity date of a bill payable after sight iscalculated from the date of the noting for non-acceptance and not from the date of theacceptance for honor

! When the bill is dishonored by the acceptor forhonor, it must be protested for non-paymentby him (to fix the liabilities of indorsers)

X. NOTICE OF DISHONOR AND PROTEST

Notice of Dishonor - bringing, either verbally orin writing, to the knowledge of the drawer andindorser the fact that a NI, upon properproceedings taken, has not been accepted or paidand the party notified is expected to pay it.

" Effect of failure to give notice: partiessecondarily liable are discharged

" Not necessary for qualified indorser or personwho negotiated the NI by delivery.

" Requisites:1. Given by holder (or his agent), or by any

party who may be compelled by the holderto pay (or his agent);

2. Given to secondary party or his agent;3. Given within the periods provided by law;4. Given at the proper place.









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" When notice of dishonor dispensed with:1. when party to be notified knows about the

dishonor, actually or constructively;2. if waived; and3. when after due diligence, it cannot be

given.

" Notice of dishonor given by or on behalf of aholder inures to the benefit of:a. all parties prior to the holder, who have a

right of recourse against the party towhom the notice is given; and

b. all holders subsequent to the holder givingnotice.

" Notice of dishonor given by or on behalf of a party entitled to give notice inures to thebenefit of:a. the holder; andb. all parties subsequent to the party to

whom notice is given.

" Where an instrument is dishonored in thehands of an agent , he can do either of the ff.:a. directly give notice to persons secondarily

liable thereon; orb. give notice to his principal.

" A party giving notice is deemed to have givendue notice where:a. the notice of dishonor is duly addressed,

andb. deposited in the post-office, even when

there is miscarriage of mail.

" Where a party receives notice of dishonor, hehas, after the receipt of such notice, the sametime for giving notice to antecedent partiesthat the holder has after the dishonor.

" Notice may be waived either before the time ofgiving notice, or after the omission to give duenotice. Waiver may be expressed or implied.

" As to who are affected by an express waiverdepends on where the waiver is written:

a. if it appears in the body or on the face ofthe instrument, it binds all parties; butb. if it is written above the signature of an

indorser, it binds him only.

" Notice of dishonor is not required to be givento the drawer in any of the ff. cases:1. drawer and drawee are the same;2. drawee is a fictitious person or not having

the capacity to contract;3. drawer is the person to whom the

instrument is presented for payment;4. the drawer has no right to expect or

require that the drawee or acceptor willhonor the instrument;

5. where the drawer has countermandedpayment.

" Notice of dishonor is not required to be givento an indorser in the ff. cases:1. drawee is a fictitious person or does not

have the capacity to contract, and indorser

was aware of that fact at the time heindorsed the instrument;

2. indorser is the person to whom theinstrument is presented for payment;

3. instrument was made or accepted for hisaccommodation.

" In Sec. 73 (place of presentment for payment),there is a particular order to follow. In Sec. 108(where notice of dishonor must be sent) thereis no particular order. What is important is thatnotice is actually received on time.

" If an instrument is not accepted by thedrawee, there is no sense presenting it againfor payment, and notice of dishonor must atonce be given. If there was acceptance,presentment for payment is still required and ifpayment is refused, there is a need for noticeof dishonor.

" An omission to give notice of dishonor by non-acceptance does not prejudice the rights of aholder in due course subsequent to theomission.

Dishonor by Non-Payment

When instrument dishonored by non-payment:a. it is duly presented for payment and payment

is refused or cannot be obtained; orb. presentment is excused and the instrument is

overdue and unpaid.

Effect of dishonor: an immediate right of recourseto all parties secondarily liable thereon accrues tothe holder.

Dishonor by Non-Acceptance

Instances:a. When it is duly presented for acceptance and

such an acceptance is refused or can not beobtained; or

b. When presentment for acceptance is excusedand the bill is not accepted (sec. 149)

Effect: an immediate right of recourse against thedrawer and indorsers accrues to the holder and nopresentment for payment is necessary.

Protest – a formal statement in writing made by anotary under his seal of office at the request of theholder of a bill or note, in which it is declared thatthe same was presented for payment oracceptance and that it was refused, whereuponthe notary protests against all parties to theinstrument & declares that they shall be heldresponsible for all loss or damage arising from itsdishonor.

" Effect of waiver: where protest is waived,presentment and notice of dishonor are alsodeemed waived. But where the notice ofdishonor is waived, presentment is not waived.

" Applicability: protest is necessary only in caseof foreign bills of exchange which have been









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dishonored by non-acceptance or non-payment, as the case may be. If it is not soprotested, the drawer and indorsers aredischarged.

" Foreign Bill of Exchange:1. Drawn in the Philippines but payable

outside the Philippines.2. Payable in the Philippines but drawn

outside the Philippines.(On the face of the instrument)

" When protest necessary in inland bills: 1. In case of protest for better security

(protest is actually optional; Sec. 158)2. A bill that is supposed to be accepted for

honor should first be protested fordishonor by non-acceptance or protestedfor better security (Sec. 161)

3. Where a dishonored bill has been

accepted for honor supra protest orcontains a referee in case of need, it mustbe protested for non-payment before it ispresented for payment to the acceptor forhonor or referee in case of need (Sec.167)

4. When the bill is dishonored by theacceptor for honor, it must be protested fornon-payment by him.

5. In case of payment for honor, prior protestfor non-payment is required (Sec. 171)

" Protest may be made by::

1. a notary public; or2. any respectable resident of the place

where the bill is dishonored, in thepresence of 2 or more credible witnesses.

Protest for better security is one made by theholder of a bill after it has been accepted butbefore it matures, against the drawer andindorsers, where the acceptor has been adjudgeda bankrupt or an insolvent, or has made anassignment for the benefit of the creditors. (Butprotest is optional).

XI. DISCHARGE

Discharge of instrument - a release of all parties,whether primary or secondary, from theobligations arising thereunder. It renders theinstrument without force and effect and,consequently, it can no longer be negotiated.

Instances:1. By payment in due course by or on behalf of

the principal debtor;2. Payment by accommodated party, where the

instrument is made or accepted for hisaccommodation;

3. Intentional cancellation by the holder;4. By any act which will discharge a simple

contract for the payment of money;5. When the principal debtor becomes the holder

of the instrument at or after maturity in his ownright.

By any act which would discharge a simplecontract :1. Payment or performance;2. Loss of the thing due;3. Condonation or remission;4. Confusion or Merger;5. Compensation;6. Novation;7. Annulment or Rescission;8. Fulfillment of a resolutory condition;9. Prescription.

When persons secondarily liable on theinstrument are discharged:1. By any act which discharges the instrument;2. By the intentional cancellation of his signature

by the holder;3. By the discharge of a prior party;4. By a valid tender or payment made by a prior

party;

5. By the release of the principal debtor, unlessthe holder’s right of recourse against the partysecondarily liable is expressly reserved;

6. By any agreement binding upon the holder toextend the time of payment or to postpone theholder’s right to enforce the instrument.

" In the following cases, the agreement toextend the time of payment does notdischarge a party secondarily liable:a. where the extension of time is consented

to by such party;b. where the holder expressly reserves his

right of recourse against such party.

" Payment at or after maturity by a partysecondarily liable does not discharge theinstrument. It only cancels his own liabilityand that of the parties subsequent to him.

Effects of Renunciation:1. A renunciation in favor of a secondary party

may be made by the holder before, at or aftermaturity of the instrument. Effect: only suchsecondary party is discharged and all partiessubsequent to him but the instrument itself

remains in force.2. A renunciation in favor of the principal debtormay be effected at or after maturity. Effect: theinstrument is discharged and all partiesthereto provided the renunciation is madeunconditionally and absolutely.

Note: In either case, renunciation does not affectthe rights of a holder in due course without notice.

" Cancellation of an instrument includes tearing,erasure, obliteration, or burning. It is notlimited to writing of the word ‘cancelled”, or“paid”, or drawing of criss-cross lines acrossthe instrument.

Payment for Honor - payment made by a person,whether a party to the bill or not, after it has beenprotested for non-payment, for the benefit of anyparty liable thereon or for the benefit of the personfor whose account it was drawn.








" Requisites:1. the bill has been dishonored by non-payment;2. it has been protested for non-payment;3. payment supra protest (another term for

payment for honor because prior protest fornon-payment is required) is made by anyperson, even by a party thereto;

4. the payment is attested by a notarial act ofhonor which must be appended to the protestor form an extension of it;

5. the notarial act must be based on thedeclaration made by the payor for honor or hisagent of his intention to pay the bill for honorand for whose honor he pays.

Note: If the above formalities are not compliedwith, payment will operate as a mere voluntarypayment and the payor will acquire no right to fullreimbursement against the party for whose honorhe pays.

" In payment for honor, the holder cannot refusepayment. If he refuses, he cannot recoverfrom the parties who would have beendischarged had he accepted the same. Inacceptance for honor, the holder’s consent isnecessary.

" The payor for honor is given the right toreceive both the bill and the protest obviouslyto enable him to enforce his rights against theparties who are liable to him.

—oOo—


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