L La aw wo on nN Ne eg go ot tiia ab blle e IIn ns st tr ru um me en nt ts s

Chapter 2 CONSIDERATION

1. Presumption of consideration. Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration, and every person whose signature appears thereon to have become a party thereto for value. (Sec. 24) 2. What constitutes value? Value is any consideration sufficient to support a simple contract. An antecedent or pre-existing debt constitutes value; and is deemed such whether the instrument is payable on demand or at a future time. (Sec. 25) EXAMPLE: a. Where P sells and delivers to M a piano worth P18,000 and M issues to P a promissory note for P20,000, there is a valuable consideration for the note which is the piano. In an action on the note, M cannot allege as a defense that the value of the piano is not adequate for the amount of the note. b. M owes P1,000 payable today. M fails to pay in cash. He issues a check for that amount to P who accepts the check. Here, the consideration for the check is the pre-existing debt of M. 3. What constitutes a holder for value? A holder for value is one who has given a valuable consideration for the instrument issued or negotiated to him. The holder is deemed as such not only as regards the party to whom value has been given by him but also in respect to all those who became parties prior to the time when value was given. EXAMPLE: a. M issues a note to P, the payee, without consideration. P, also without consideration, indorses it to A who, with value, indorses it to B. B is deemed a holder for value not only as regards A but also as regards M and P. If B is a holder in due course, he may enforce payment for the full amount of the note against M, P and A. If B is not a holder in due course, M can set up the defense of absence of consideration. b. Suppose in the same example, B negotiates the note to C by way of a gift. C is a holder for value as against M, P and A because they became parties prior to the time when value was given on the note by B. 4. When lien on instrument constitutes holder for value. Where the holder has a lien on the instrument arising either from contract or by implication of law, he is deemed a holder for value to the extent of his lien. (Sec. 27) PROBLEM: M issues a promissory note payable to the order of P for P10,000. Later, P indorses the whole amount of the note to H to secure his debt of P8,000. H is a holder for value to the extent of his lien of P8,000. At maturity how much may H collect from M? 5. Effect of want of consideration: a. Absence or failure of consideration may be set up against a holder not a holder in due course (personal defense) b. Partial failure of consideration is a defense pro tanto (Sec 28 NIL) EXAMPLE: M makes a promissory note in payment of a parcel of land which does not exist. As between the parties, there can be no recovery on the note as there is absence of consideration. But if P indorses the note to A, a holder in due course, A can recover from M because absence of consideration is only a personal defense not available against a holder in due course. In the example, if there is really a land owned by P which was sold, but P failed to deliver it to M because he sold it again to X who in good faith registered the sale, there is a failure of consideration so that P cannot recover from M. If only 2/3 portion of the land was delivered, there would be a partial failure of consideration which would bar recovery only pro tanto. Hence, P could recover only 2/3 of the note as M is not liable to the extent of 1/3 which is the price of the undelivered portion.

Chapter 2 Consideration

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L La aw wo on nN Ne eg go ot tiia ab blle e IIn ns st tr ru um me en nt ts s

PROBLEM: a. M issued a promissory note payable to the order of P for P10,000 for a ring which P said was made of pure gold but which was only gold plated. Subsequently, P indorsed the note to A, A to B, B to C, and C to H. On due date, how much, if any may H collect from M? b. M issued a promissory note payable to the order of P for P10,000 for merchandise he purchased from the latter. P, however, was able to deliver merchandise worth P7,000 only. Later, P indorsed the note to A, A to B, B to C, and C to H. At maturity, how much may H collect from M? 6. Accommodation bill or note defined. It is one to which the accommodation party has put his name, without consideration, for the purpose of accommodating some other party who is to use it, and is expected to pay it. 7. Accommodation party defined. One who has signed the instrument as maker, drawer, acceptor or indorser, without receiving value therefor and for the purpose of lending his name to some other person. (Sec. 29) 8. Accommodated party defined. One in whose favor a person, without receiving value therefor, signs an instrument for the purpose of lending his credit and enabling said party to raise money upon it. (Sec. 29) 9. Liability of the accommodation party. a. He is not liable to the accommodated party because absence of consideration between them is a defense against the accommodated party. b. He is liable on the instrument to a holder for value notwithstanding such holder at the time of taking the instrument knew him to be only an accommodation party. This means that such absence of consideration is not a valid defense against a holder for value. (Sec. 28) c. He is liable only to a holder for value who is a holder in due course. 10. Rights of the accommodation party. a. An accommodation party is, in effect, a surety for the accommodated party. In case he makes payment to the holder, he may sue the accommodated party for reimbursement. b. He cannot a vaild of the defense of absence of consideration against a holder for value. 11. Suppose a person receives consideration for lending his name in a negotiable instrument, may he still be considered an accommodation party? Yes. The phrase without receiving value thereof means without receiving value by virtue of the instrument, and not without receiving payment for lending his name.

Chapter 2 Consideration

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