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1007-Negotiable Instruments

NEGOTIABLE INSTRUMENTS
NATURE OF NEGOTIABLE INSTRUMENTS
Commercial Functions of Negotiable Instruments (Bar 1951)
1. To supplement the current of the government and
2. To substitute for money and increase the purchasing medium.
Characteristics or features of negotiable instruments (Bar 1967)
(1) Negotiability is that quality or attribute whereby a bill, note or check
passes or may pass from hand to hand similar to money, so as to give the
holder in due course the right to hold the instrument and collect the sum
payable for himself free from defenses.
(2) Accumulation of secondary contracts as they are transferred from one hand
to another.
Negotiable Instruments and Non-negotiable instruments distinguished
Negotiable Instruments
Contains all the requisites of Sec. 1.

Non-negotiable Instruments
Does not has any, some or all of the
requisites mentioned in said law
Transferable by assignment
A transferee acquires no right no
better than his transferor

Transferred by negotiation
Holder in due course of a negotiable
instruments can have rights better
than his transferor
Prior
parties
to
a
negotiable
instruments warrant payment.

Prior
party
to
a
non-negotiable
instruments
does
not
warrant
payment but merely the legality of
his title.

Rights acquired by a bona fide transferee for value under an assignment and
the rights acquired under a negotiation distinguished (Bar 1949)
Better right

Right of recourse

Assignment
No better right than his
transferor
Has no right of recourse
for payment against
intermediate parties.

Negotiation
(if a holder in due
course) may acquire
rights better than his
predecessors
Can hold the drawer and
the indorsers liable if
the party primarily
liable does not pay.

Doubt resolved in favor of negotiability


Where the meaning is doubtful, the courts have adopted the policy of resolving
in favor of the negotiability of the instrument.
Instruments with limited negotiability
There are certain documents of title (Part II) with limited negotiability
which are also widely used in commercial transactions but have been held to be
non-negotiable because they do not have the requisites that are essential
under the Negotiable Instruments Law.
They are beyond the scope of the
Negotiable Instruments Law and are, therefore, governed by other laws.

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1007-Negotiable Instruments
Among such documents with limited negotiability are the following:
(1) Letter of credit it is in favor of a specified person and not to order.
(2) Treasury warrant it is payable out of a specific fund or appropriation.
(3) Postal money order it is subject to restrictions and limitations under
postal laws and regulations (only one indorsement is allowed) inconsistent
with the character of negotiable instrument.
(4) Bill of lading it is without an unconditional promise or order to pay a
sum certain in money.
(5) Certificate of stock it is also without an unconditional promise or
order to pay a sum certain in money.
(6) Warehouse receipt it is likewise without an unconditional promise or
order to pay a sum certain in money.
Principal Classes of Negotiable Instruments (Bar 1965, 1953,1951, 1949)
1. Promissory notes;
2. Bill of exchange; and
3. Check, which is just a special form of a bill of exchange.
Promissory Note is an unconditional promise in writing by one person to
another signed by the maker engaging to pay on demand or at
a fixed or determinable future time, a sum certain in money,
to order or bearer.
Bill of Exchange is an unconditional order in writing addressed by one
person to another, signed by the person giving it, requiring
the person to whom it is addressed to pay on demand or at a
fixed or determinable future time a sum certain in money to
order or bearer.
Check is a bill of exchange drawn on a bank payable on demand.
Differences between a Promissory Note and a Bill of Exchange
Promissory Note
Unconditional promise

Bill of Exchange
Unconditional order

As to number of parties

There are two original


parties

There are three

As to liability of
original issuer

The original issuer is


primarily liable

The original issuer is


secondarily liable

As to number of
presentment

Only one presentment


(for payment) is needed.

Two presentments (for


acceptable and for
payment) are generally
needed.

As to contents

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1007-Negotiable Instruments

FORM AND INTERPRETATION OF NEGOTIABLE


INSTRMENTS
Requisites of a negotiable Instruments (Sec. 1)

(Bar 2000, 1996, 1993, 1992, 1989, 1968,1964, 1954, 1953)


An instrument to be negotiable must conform to the following requirements:
(1) It must be in writing and signed by the maker or drawer;
(2) Must contain an unconditional promise or order to pay a sum certain in
money;
(3) Must be payable on demand, or at a fixed or determinable future time;
(4) Must be payable to order or to bearer; and
(5) Where the instrument is addressed to a drawee, he must be named or
otherwise indicated therein with reasonable certainty.
Formal requirements of negotiability in general
In determining the negotiability of an instrument, the following must be
considered:
(1) the whole instrument;
(2) only what appears on the face of the instrument; and
(3) the provision of the Negotiable Instruments Law especially Section 1
thereof which gives the requirements of negotiability.
Requisites of a Promissory Note
(Bar 2000, 1989, 1988, 1970, 1966, 1961, 1950, 1949)
(1) It must be in writing and signed by the maker;
(2) It must contain an unconditional promise to payment a sum certain in
money;
(3) It must be payable on demand or at a fixed or determinable future time;
(4) It must be payable to order or bearer.
Requisites of a Bill of Exchange (Bar 1961, 1959)
(1) It must be in writing and signed by the drawer;
(2) It must contain an unconditional order to pay a sum certain in money;
(3) It must be payable on demand or a fixed or determinable future time;
(4) It must be payable to order or to bearer;
(5) The drawee must be named or otherwise indicated with reasonable certainty.
MEANING OF PARTICULAR REQUISITES
Unconditional Promise or Order (Sec. 3)
Where the promise or order to pay is made to depend on a contingent event, it
is conditional, and makes the instrument non-negotiable.
The conditional nature of the promise or order is not affected by:
(1) an indication of a particular fund from which the acceptor reimburses
himself after paying the holder; and
(2) a statement of the transaction which gives rise to the instrument.

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1007-Negotiable Instruments
Certainty as to sum (Sec. 2)
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.
In money
General Rule:
If some other act besides payment of money is promised or ordered, the
instrument becomes non-negotiable.
The following acts, however, do not affect negotiability:
1. Authorizes the sale of collateral securities in default;
2. Authorizes confession of judgment on default;
3. Waives the benefit of law intended to protect the debtor; and
4. allows the creditor the option to require something in lieu of money.
When payable on demand (Sec. 7) (Bar 1952)
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.

Determinable future time (Sec. 4)


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.

When payable to order. (Sec. 8.)


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.

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1007-Negotiable Instruments
When payable to bearer. (Sec. 9.) (Bar 1980, 1960)
The
(a)
(b)
(c)

instrument is payable to bearer


When it is expressed to be so payable; or
When it is payable to a person named therein or bearer; or
When it is payable to the order of a fictitious or non-existing person,
and such fact was known to the person making it so payable; or
(d) When the name of the payee does not purport to be the name of any person;
or
(e) When the only or last indorsement is an indorsement in blank.

Omissions; seal; particular money (Sec. 6)


The validity and negotiable character of an instrument are not affected
fact that:
(a) It is not dated; or
(b) Does not specify the value given, or that any value had been
therefor; or
(c) Does not specify the place where it is drawn or the place where
payable; or
(d) Bears a seal; or
(e) Designates a particular kind of current money in which payment is
made.

by the
given
it is
to be

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.

Rules on Dates

There are several important principles as to dates in negotiable instruments.


These are:
(1) Where the instrument, its acceptance, or indorsement is dated, such date
is presumed to be the corresponding true date. (Sec. 11)
(2) Date is important
(a) Where the instrument is payable within a specified period after date,
or after acceptance, in which case the date of the instrument and the
date of acceptance are needed to determine the date of maturing of the
instrument; in these cases, the holder may insert the true date; (Sec.
13)
(b) When the instrument is payable on demand, date is necessary to
determine whether the instrument was presented within reasonable time
from issue in the case of notes or from last negotiation in the case
of bills, as these facts will show whether the last holder in due
course is not; nad
(3) Antedating and postdating an instrument does not affect validity or
negotiability, unless done for illegal or fraudulent purpose. (Sec. 12)

When date may be inserted (Sec. 13)


Where an instrument
a) expressed to be payable at a fixed period after date is issued undated, or
b) where the acceptance of an instrument payable at a fixed period after sight
is undated, any holder
1) may insert therein the true date of issue or acceptance, and
2) the instrument shall be payable accordingly.
3) The insertion of a wrong date does not avoid the instrument in the hands of
a subsequent holder in due course;
4) but as to him, the date so inserted is to be regarded as the true date.

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1007-Negotiable Instruments
Effect of insertion of wrong date
The insertion of a wrong date in an undated instrument by one having knowledge
of the true date of issue or acceptance will avoid the instrument as to him
but not as to a subsequent holder in due course who may enforce the same
notwithstanding the improper date. In the hands of a holder in due course,
the date inserted even if wrong, is to be regarded as the true date. (Sec. 13)
The insertion of a wrong date constitutes a material alteration.

Rules on Interpretation of Instruments (Sec. 17) (Bar 1965)

(1) Discrepancy between the amount in figures and that of words the words
prevail, but if the words are ambiguous, reference will be made to the
figures to fix the amount;
(2) Instrument is not dated considered dated on date of issue.
(3) Conflict between written and printed provisions written provisions
prevail.
(4) Interest Provided for, but No starting Date specified starting date is
the date of instrument, in the absence of said date, from date of issue.
Instrument Ambiguous that there is doubt whether it is a bill or a note
(Bar 1998, 1946)
The holder may treat it as a note or a bill at his option.
Rule is signature is so place upon an instrument that it is not clear in what
capacity the person making the same intended to sign. (Bar 1946)
He is deemed to be an indorser.
Rule where PN worded I promise to Pay is signed by two makers
(Bar 2001, 1969, 1946)
The parties bind themselves jointly and severally.

Blanks; when may be filled. (Sec. 14)


Where the instrument is wanting in any material particular,
1) the person in possession thereof has a prima facie authority to complete it
by filling up the blanks therein.
2) 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.
3) In order, however, that any such instrument when completed may be enforced
against any person who became a party thereto prior to its completion,
a) it must be filled up strictly in accordance with the authority given and
b) within a reasonable time.
c) But if any such instrument, after completion, is negotiated to a holder
in due course,
1) it is valid and effectual for all purposes in his hands, and
2) he may enforce it as if it had been filled up strictly in
accordance with the authority given and within a reasonable time.

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1007-Negotiable Instruments

ABNORMAL AND SIMILARLY DEFICIENT NEGOTIABLE


INSTRUMENTS
Situations Where Subsequent Holder in Due Course not Affected by Abnormality
or Deficiency
1. Incomplete but delivered negotiable instruments;
2. Complete but undelivered Negotiable Instruments;
3. Complete and delivered instruments issued
(a) without consideration, or
(b) with a consideration consisting of a promise
which the payee
failed to comply with
Exception: case of accommodation.
Situations Where a Subsequent Holder in Due Course is Affected
Abnormality or Deficiency
1. Incomplete and undelivered negotiable instruments (Sec. 15)
2. Signature of maker or drawer is forged
Exceptions: Where the forgery
particular in the instrument.

consists

of

an

alteration

of

by

the

material

Delivery; when effectual; when presumed. (Sec. 16.)


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,
1) 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,
2) 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.
3) 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.
4) 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.

RULES UNDER THE NEGOTIABLE INSTRUMENTS LAW


Incomplete but delivered (Bar 1972)
(1) Holder has prima facie authority to complete the instrument;
(2) Completion to be done within a reasonable time and according to the
authority given;
(3) Holder in due course of the instrument previously completed in breach of
instructions can enforce the same as if regularly completed.

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1007-Negotiable Instruments
Complete but undelivered (Bar 1961)
(1) Between immediate parties and a remote party not a holder in due course,
delivery to be effectual must be made by or under the authority of the
maker, drawer, acceptor or indorser, as the case may be;
(2) If the instrument is in the hands of a holder in due course, all prior
deliveries are conclusively presumed valid;
(3) If the instrument is out of the hands of the person who signed it, a valid
intentional delivery is disputably presumed.
Incomplete instrument not delivered (Sec. 15)
(Bar 1997, 1985, 1982, 1978, 1971)
It will not, if completed and negotiated without authority, be a valid
contract in the hands of any holder, as against any person whose signature was
placed thereon before delivery.
Rules where instrument incomplete and undelivered
(1) Defense even against a holder in due course.
The fact that an incomplete instrument, completed without authority, had
not been delivered, is a defense even against a holder in due course.
(2) Defense available to parties prior to delivery.
The invalidity of the above instrument is only with reference to the
parties whose signature appear on the instrument before and not after
delivery.
Absence or Failure of Consideration (Bar 1989, 1986, 1971, 1969, 1968)
(1) Absence of consideration is the total lack of consideration, no
consideration, or illegal consideration.
(2) Failure of consideration is failure to the agreed consideration to
materialize.
(3) Both absence and failure of consideration are defenses personal to the
prejudiced party, and available against any person not a holder in due
course.
Forgery (Bar 1995, 1989, 1984)
(1) Forgery is the counterfeit making or fraudulent alteration of any writing.
(2) It may consist of:
(a) Signing of anothers name with intent to defraud;
(b) Alteration of an instrument in the name, amount, description of payee,
etc. with intent to defraud;
(3) The signature is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefore, or to enforce payment
thereof against any party to it, is acquired through or under such
signature.

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1007-Negotiable Instruments
MATERIAL ALTERATION OF INSTRUMENT (Bar 1999, 1996, 1983, 1977, 1972)
Material Alteration Defined
Any alteration which changes the
(1) date;
(2) sum payable; (Bar 1993, 1971)
(3) time and place of payment;
(4) number or relation of the parties; or
(5) medium or currency of payment; or
(6) adds a place of payment where none is specified, or
(7) which alters the effect of the instrument in any respect
is material alteration.
Effect of material alteration
A material alteration avoids the instruments except as against the party who
made, authorized or assented to the alteration, and subsequent
indorsers.
Where the altered instrument, however, is in the hands of a holder in due
course, not a party to the alteration, he may enforce payment thereof
according to its original tenor.

ACCOMMODATION
(Bar 1996, 1993, 1991, 1990, 1985, 1976, 1975, 1971, 1964,1952)
Accommodation is a legal arrangement under which a person
accommodation party lends his name and credit to another
accommodated party, without consideration.

called
called

the
the

A person to whom the instrument thus executed is subsequently negotiated, has


a right of recourse against the accommodation party inspite of the formers
knowledge that no consideration passed between the accommodation and
accommodated parties.
Requisites of Accommodation
(1) The accommodation party must sign as maker, drawer, acceptor or indorser;
(2) No value is received by the accommodation party from the accommodated
party; and
(3) The purpose is to lend the name.
Accommodation party a person who has signed the instrument as maker, drawer,
acceptor or indorser without receiving value therefore, and
for the purpose of lending his name to some other person, is
under the law liable on the instrument to a holder for value
notwithstanding that such holder at the time of taking the
instrument knew him only to be an accommodation party.
Rights of Against Accommodation party
The accommodation party, is obliged to pay to a holder of value, can seek
reimbursement from the accommodated party.

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1007-Negotiable Instruments
Against the Co-accommodation party
The Negotiable Instruments Law does not define the right of an accommodation
maker to seek reimbursement from another accommodation maker, this deficiency
should be supplied by Art. 2073 of the New Civil Code.
Where a solidary
accommodation maker paid to the bank the balance due on a promissory note, he
may seek contribution from the other solidary accommodation maker, in the
absence of a contrary agreement between them.
A solidary accommodation maker
(1) may demand from the principal debtor reimbursement of the amount which
he paid on the promissory note, and
(2) he may demand contribution from his co-accommodation maker, without
first directing his action against the principal debtor, provided that
(a) he made the payment by virtue of a judicial demand; or\
(b) the principal debtor is insolvent.

FORGERY OF CHECKS
Forged signature (Sec. 23)
When a signature is forged or made without the authority of the person whose
signature it purports to be,
a) it is wholly inoperative, and
b) no right to retain the instrument, or
c) to give a discharge therefor, or
d) to enforce payment thereof against any party thereto, can be acquired
through or under such signature,
e) unless the party against whom it is sought to enforce such right is
precluded from setting up the forgery or want of authority.

Forgery in Signature of the Drawer on a Check


(Bar 1992, 1987, 1977, 1949)
The drawer is not liable and his drawee bank cannot charge the drawers
account for said check because a bank is supposed to kwon the signatures of
its customers, and bears the damage in case it pays under a forged signature
of its drawer-customer
Effect if customer drawer did not exercise ordinary care which substantially
contributed to the making of the forged signature
Drawer is precluded from asserting the forgery.
If at the same time the
drawee bank was also negligent to the point of contributing to the loss, then
such loss from forgery can be apportioned between the negligent drawer and the
negligent bank.

Forgery in the Signature of Indorsers

(Bar 1990, 1983, 1982, 1976, 1970, 1957, 1950, 1948)


Types of Forgery of Indorsers signature
1. Forgery was accomplished by a person not associated with the drawer;
2. the indorsement was forged by an agent of the drawer.

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1007-Negotiable Instruments
Effect of Forger of the signature of indorser
The loss will be borne by the
(1) Forger or
(2) By party subsequent to said forger
(3) Including the collecting bank where the check was eventually deposited.
Right of drawee bank to debit the account of the drawer in case of forger of
signature of indorser
The drawee bank may debit the drawers account. While the drawee bank must be
cautious in the scrutiny of the signatures of drawers of checks drawn on it
under the theory that it should know the signatures of its own clients, it has
however no responsibility for the signatures of indorsers, the payee being one
of them.
In banking practice, the signatures of the indorsers, as a prerequisite to
clearing, are guaranteed by the bank where the check may be deposited by the
last holder.
If any of these indorsements are forgeries, immediate
responsibility will be on that bank which guaranteed the indorsements, not on
the drawee bank of the check.

EXECUTION AND NEGOTIATION OF THE


INSTRUMENTS BY AGENTS AND OTHERS
Execution by Agents
Requisites: (ADS)
1. The agent must be authorized;
2. He must disclose his principal;
3. He must sign for and in behald of his principal.

Signature by agent; authority; how shown (Sec. 19)


The signature of any party
1) may be made by a duly authorized agent.
2) No particular form of appointment is necessary for this purpose; and
3) the authority of the agent may be established as in other cases of agency.

Liability of person signing as agent, and so forth (Sec. 20)


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,
1) he is not liable on the instrument if he was duly authorized;
2) 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.

Signature by procuration (Sec. 21)


A signature by "procuration"
a) operates as notice that the agent has but a limited authority to sign, and
b) the principal is bound only in case the agent in so signing acted within
the actual limits of his authority.

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1007-Negotiable Instruments
Meaning of procuration
Procuration is the act by which a principal gives power to another to act in
his place as he could himself.
It is ordinarily understood in the same sense
as agency or proxy, for one who signs is merely acting as agent for another.

Liability of person signing in trade or assumed name (Sec. 18)


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.

Effect of indorsement by infant or corporation (Sec. 22) (Bar 1998, 1989)


The indorsement or assignment of the instrument by a corporation or by an
infant
a) passes the property therein, notwithstanding that from want of capacity,
b) the corporation or infant may incur no liability thereon.
Effect of indorsement by incapacitated persons
(1) Minors As a general rule:
Contracts entered into by a minor are
voidable (Art. 1327, 1329, 1390, Civil Code) at his instance or at the
instance of his guardian.
(a) While a minor is not bound by his indorsement for lack of capacity, he
is, however, not incapacitated to transfer certain rights.
Minority
is not a even a personal defense which may be set up by parties other
than the minor; but it is a real defense available to the minor.
(b) A minor may be held bound by his signature in an instrument where he
is guilty of actual fraud committed by specifically stating he is of
age when, in fact he is not. (Mercado vs. Espiritu, 37 Phil. 215)
(2) Other Incapacitated Persons other persons, besides minors, who have no
capacity to give consent are insane or demented persons and deaf-mutes who
does not know how to write. (Art. 1327, Civil Code).
As far as such
persons themselves are concerned, their capacity is a real defense, that
is, it is available even against a holder in due course. (Sec. 57 and 58)
Effect of indorsement by a corporation
As regards to corporation, Section 22 applies to cases where the corporation
has committed ulta vires acts or acts beyond its powers.
It has been held
that a corporation is not liable on notes in a suit thereon by an indorsee,
where the corporation is without capacity to make a contract in fulfillment of
which they were executed.

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1007-Negotiable Instruments

LIABILITIES OF PARTIES
Parties Primarily Liable (Bar 1999, 1947)
(1) Maker;
(2) Acceptor or the Drawee Who Accepts the Instruments;
Warranty of the Maker
(1) Engages to pay according to the tenor of the instrument;
(2) Admits the existence of the payee and his capacity to indorse.
Warranty of the Acceptor or the Drawee who accepts the instrument
(1) Engages to pay according to the tenor of his acceptance;
(2) Admits the existence of the drawer, the genuineness of his signature, and
his capacity and authority to draw the instrument.
(3) Admits the existence of the payee and his capacity to indorse.

Parties Secondarily Liable


(1) The drawer;
(2) The general indorser;
(3) The irregular indorser.

Warranty of the Drawer (Bar 1997, 1986)


(1) Admits the existence of the payee and his capacity to endorse.
(2) Engages that the instrument will be accepted or paid by the party
primarily liable.
(3) Engages that if the instrument is dishonored and proper proceedings are
brought, he will pay to the party entitled to be paid.
Warranty of the General Indorser (Bar 1981, 1946)
(1) Warrants
(2) Engages that the instrument will be paid by the party primarily liable.
(3) Engages that if the instrument is dishonored, and proper proceedings are
taken, he will pay to the party entitled to be paid.
Warranty of the Irregular Indorser (Bar 1981, 1946)
Defined
An irregular indorser is one who affixes his signature in blank on an
instrument before delivery.
Rules as to liability
(1) Instrument payable to order of this person irregular indorser liable to
payee and to subsequent parties;
(2) Instrument payable to order of maker or drawer he is liable to all
parties subsequent to the maker or drawer;
(3) Irregular indorser signs for accommodation of payee he is liable to all
parties subsequent to the payee.

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1007-Negotiable Instruments
Parties with Limited Liability
(1) The qualified indorser;
(2) Person negotiating by delivery.
Warranties of a Qualified Indorser (1946)
(1) That the instrument is genuine and in all respects what is purports to be;
(2) That he has good title to it;
(3) That all prior parties had capacity to contract;
(4) That he has no knowledge of any fact which would impair the validity of
the instrument, or render it valueless.
A qualified indorsement constitutes the indorser a mere assignor of the title
to the indorser a mere assignor of the title to the instrument. It may made
by adding to the indorsers signature the works without recourse or any word
of similar import.
Warranties Negotiating by Delivery (Bar 1979)
(1) Warranties same as those of a qualified indorser;
(2) Warranties extend to immediate transferee only.

WHEN SECONDARY LIABILITY ATTACHES


Acts Needed before Secondary Liability Attaches (Bar 1984, 1963, 1946)
(1) Presentment for payment in notes and present for acceptance and/or payment
in bills of exchange;
(2) Dishonor by non-payment in notes and dishonor by non-acceptance and/or
non-payment in bills of exchange;
(3) Notice of dishonor to secondary parties.
Order in Which Indorses Liable
They are liable in the order in which their indorsements appear in the
instrument the latter ones having a right of recourse against the prior
ones.

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28

1007-Negotiable Instruments

INCIDENTS IN THE LIFE OF AN INSTRUMENTS


AFTER ITS ISSUE
Negotiation Defined (Bar 1963)
Negotiation is the transfer of a negotiable instrument from one person to
another as to constitute the transferee the holder thereof.
Rights Transferred by Negotiation (Bar 1949)
Negotiation constitutes the transferee a holder of the instrument. A holder
is entitled to collect the instrument from the party primarily liable, and if
dishonored, from the secondary parties.
He can sue in court on the
instrument. If the holder is a holder in due course, he takes the instrument
free from defects of title of prior parties, fee from defenses of prior
parties among themselves, and he can enforce the instrument for the full
amount thereof against all parties liable thereon.
Classes of Negotiation (Bar 1998, 1988, 1975, 1967)
Manner of Negotiation
By delivery of the
instrument alone

By indorsement followed
by delivery

When applicable
Instrument is originally payable to bearer
or
Originally payable to order where last indorsement is
in black
Instrument payable to the order specified person.

Classes of Indorsements (Bar 1975, 1969, 1968, 1960, 1950, 1948)


An indorsement whether of a check or other negotiable instrument may be
(1) special or
(2) in blank or
(3) it may be restrictive,
(4) qualified,
(5) conditional,
(6) general,
(7) regular, or
(8) irregular.
Special indorsement the name of the indorsee is specified.
Blank indorsement is an indorsement which does not specify the name of the
indorsee, and usually consists of the indorsers
signature, and nothing else, found at the back of the
instrument.
Restrictive indorsement limits the right of the indorsee by restricting
further negotiation, or making the indorsee the
collecting agent of the indorser, or making him
(indorsee) a trustee of a person named in the
indorsement.

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29

1007-Negotiable Instruments
Qualified indorsement is one where the indorser places under his signature
the words without recourse or the like.
The
qualified indorser does not become liable secondarily
under his indorsement.
Regular indorsement is one placed after the issue of the instrument.
Irregular indorsement is one placed in blank before the issue of the
instrument.
Striking Out of Indorsements
The holder may strike out indorsements not necessary to his title.
The
indorser whose indorsement is struck out and all indorsers subsequent to him
are relieved from liability on the instruments.

RIGHTS OF HOLDER
Rights of Holder in General
The holder of a negotiable instrument may sue thereunder in his own name, and
payment to him in due course discharges the instrument.
Classes of Holders
(1) Holder in Due Course;
(2) Holder not in due Course.
What constitute a holder for value. (Sec. 26)
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 value was given.
A holder of a negotiable instrument is presumed to be a holder for value until
the contrary be shown by any party who claims otherwise.
Requisites to be a holder in due course
(1) Who takes the instrument in good faith and for value;
(2) At the time the instrument was negotiated to him he nod no notice of any
defect in the title of the person negotiating it;
(3) Provides that every that every holder is deemed prima facie to be a holder
in due course.
When is a holder of an instruments a holder in due course
(Bar 2000, 1996, 1992, 1966, 1952, 1946)
A holder in due course is a holder who has taken the instrument under the
following conditions:
(1) that it is complete and regular upon its face;
(2) that he became the holder of it before it was overdue and without notice
that it had been previously dishonored if such was the fact;
(3) that he took it for value and in good faith;
(4) that at the time was negotiated to him he had no notice of any infirmity
in the instrument or defect in the title of the person negotiating it.

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30

1007-Negotiable Instruments
Rights of a holder in Due Course (Bar 1996, 1946)
Like any holder, a holder in due course may enforce the instrument and sue
thereon in his own name.
(1) He holds the instrument free from any defect of title of prior parties;
(2) Free fron defenses of prior parties among themselves, and
(3) He may enforce payment of the instrument for full amount thereof,
against all parties liable thereon.

Holder Not in Due Course

(Bar 1977, 1962)


A holder not in due course is one who became a holder of an instrument without
any, some, or all of the requisites under Sec. 52 of the Negotiable
Instruments Law.
Rights of Holder not in Due Course (Bar 1946)
A holder not in due course can enforce the instrument and sue under it in his
own name. Prior parties, however, even though remote, can avail against him
any defense among these prior parties and prevent the said holder from
collecting in whole or in part the amount stated in said instrument.

DEFENSES OF PRIOR PARTIES AGIANST THE HOLDER


Classes of Defenses
(1) Real or absolute Defenses
(2) Personal or Equitable Defenses
Real or Absolute Defenses Defined (Bar 1955)
Is a defense which attaches to the instrument irrespective of the parties and
is predicated on the principle that the right sought to be enforced has never
existed or has ceased to exist.
Examples
1. Forger or unauthorized signature;
2. Void contract;
3. Material alteration;
4. Incomplete and undelivered instrument.
Against Whom Available
A real defense is available against all holders, whether in due course or not.
Person or Equitable Defenses (Bar 2001, 1978)
Is a defense growing out of an agreement or conduct of a particular person in
regard to an instrument which renders it inequitable for him, although owner
of it, to enforce it against the defendant.
Examples
1. Complete but undelivered instrument
2. delivered but incomplete instrument
3. absence or failure of consideration
4. defect of title

Against Whom Available

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1007-Negotiable Instruments
The defense is available against all holders not in due course, except those
who derive their rights from holders in due course and who are not parties to
any fraud or illegality affecting the instrument.

PRESENTMENT
PROMISSORY NOTES
Purpose of Presentment for Payment
Not necessary to make the maker liable, but it is necessary to make the
secondary parties liable.
Requisites of Presentment (Bar 2000)
(1) Made within a reasonable time after issue;
(2) By the holder or his agent;
(3) To the party liable under it;
(4) At a reasonable hour on a business day; and
(5) At the proper place.
The holder must exhibit the instrument to the debtor and should deliver it to
said debtor if the latter pays.
When Presentment is not Required
(1) When after due diligence presentment cannot be made;
(2) When presentment is waived, and
(3) When the indorser is an accommodated party.
When Instrument Considered Dishonored
(1) When after due presentment for payment, payment is refused, and
(2) When presentment being excused, the instrument is overdue and unpaid.

IN BILLS OF EXCHANGE
Kinds of Presentment in bills of Exchange
1. Presentment for acceptance and
2. Presentment for payment.
PRESENTMENT FOR ACCEPTANCE OF A BILL (Bar 1994)
Purpse
To gent acceptance of the drawee for the purpose of making him liable
primarily as an acceptor.
It is also a prerequisite to the accrual of
secondary liability against the drawer and the indorsers.
When Necessary
(1) To fix the maturity date;
(2) Where the bill expressly stipulates presentment
(3) Where the bill is drawn payable elsewhere than at the residence or place
of business of the drawee.
Requisites
Presentment for acceptance must be made within a reasonable time, by the
holder or his agent, to the drawee or his agent at a reasonable hour on a
business day, before the bill is overdue.
When Presentment for Acceptance is Excused

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1007-Negotiable Instruments
Presentment for acceptance is excused:
(1) where the drawee is dead, hides, or is a fictitious or incapacitated
person;
(2) when after due diligence, presentment cannot be made;
(3) when acceptance is refused on another ground although presentment is
irregular.
When instrument Dishonored by Non-acceptance
The instrument is considered dishonored by non-acceptance:
(1) where such acceptance is refused or cannot be obtained; and
(2) where acceptance being excused, the bill is not accepted.
PRESENTMENT FOR PAYMENT OF ACCEPTED BILL
Purpose
The purpose of presentment for payment of an accepted bill is to collect from
the acceptor, and if refused, to collect from the secondary parties.
Requisites
The accepted bill must be presented for payment within a reasonable time from
the last negotiation by the holder or his agent, to the acceptor or his agent,
at a reasonable hour on a business day, and the proper place as defined. The
bill must be exhibited to the acceptor and surrendered to him when he pays.
When Excused
Presentment for payment is excused:
(1) when after due diligence, it cannot be made
(2) when the drawee is a fictitious person, and
(3) where there is a waiver of presentment.

ACCEPTANCE IN BILLS OF EXCHANGE (Bar 1947)


Defined
Acceptance is the signification by the drawee of his assent to the order of
the drawer.
Requisites
The acceptance must be in writing, signed by the drawee, and must not express
that the drawee will perform his promise by means other than money payment.
How made
The acceptance may be on the bill, on a separate paper, and may even be made
in writing before the bill is drawn.
The drawee, if he wants to dishonor, must do so expressly within twenty four
(24) hours from presentment to him. If he refuses to act, tears the bill, or
refuses to return the bill within said period of twenty four hours, he is
deemed to have accepted the bill.
Classes of Acceptance
(1) General and qualified
(2) Express and Constructive
General Acceptance Assents without qualification to the order of the drawer.
Qualified Acceptance varies the effect of the bill as drawn.
is qualified if it is:

Cabarles Notes

33

The acceptance

1007-Negotiable Instruments
(a)
(b)
(c)
(d)
(e)

Conditional;
Partial
Local
Qualified as to time
Accepted by some or more of the drawees but not by
all

Express if it is written on the instrument by the drawee.


Constructive if the drawee, within twenty four hours from presentment to him
of the instrument, destroys the same, or refuses or
fails to return the bill accepted or unaccepted.

DISHONOR
Dishonor in Promissory Notes
In a promissory note, dishonor by non-payment takes place when it is duly
presented for payment and payment is refused or cannot be obtained; or if
presentment is excused, the instrument is overdue and unpaid.

Dishonor in Bills of Exchange


Where bill is presented for acceptance and is returned dishonored, or within
twenty four hours from presentment, is not returned accepted or unaccepted,
there is a dishonor by non-acceptance.
There is a dishonor by non-payment if the bill, after it has been accepted, is
not paid when presented for payment, or presentment being excused, is not paid
on the date of maturity.

NOTICE OF DISHONOR

(Bar 1996, 1952)

Defined
It is a notice given by the holder or his agent to the party or parties
secondarily liable that the instrument was dishonored by non-acceptance by the
drawee of a bill, or by non-payment by the acceptor of a bill or by nonpayment by the maker of a note.
Purpose
The notice of dishonor is given by the holder to the parties secondarily
liable, for the purpose of preserving his right of recourse against them.
Requisites
The notice
(1) by the
holder
(2) to the
(3) within
(4) at the

is given:
holder or his agent, or by any party who may be compelled by the
to pay;
secondary party or his agent
the periods provided for by law and
proper place.

When Dispensed with


Notice of dishonor may be dispensed with
(1) if waived
(2) when after due diligence, it cannot be given, and

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1007-Negotiable Instruments
(3) when the party to be notified knows about the dishonor, actually or
constructively.
When notice of dishonor not required to be given to the Drawer
(1) when the drawer and the drawee are the same person;
(2) when the drawee is a fictitious or incapacitated person;
(3) when the drawer is the person to whom the instrument is presented for
payment;
(4) when the drawer has no right to expect that the drawee will accept, or
that the acceptor will pay, the instrument.
When notice of dishonor not required to be given to the Indorser
(1) when the drawee is a fictitious or incapacitated person and the indorser
was aware of it at the time of his indorsement;
(2) where the indorser is the person to whom the instrument was presented for
payment, and
(3) where the instrument was made or accepted for his accommodation.

PROTEST IN LIEU OF DISHONOR IN FOREIGH BILLS


Foreign Bill Defined
A foreign bill is a bill of exchange which is not on its face drawn and made
payable within the Philippines.

PROTEST
Protest Defined
A protest is a formal instrument, executed by a notary or other competent
person, certifying that the facts necessary to the dishonor of the instrument
by non-acceptance or non-payment have taken place.
When Required
When a foreign bill
non-acceptance. If
payment. If not so
must be made on the
security.

is dishonored by non-acceptance it must be protested for


dishonored by non-payment, it must be protested for nonprotested, the drawer and indorsers are discharged. It
day of dishonor. There may also be a protest for better

How made (Bar 1948)


A protest is made by a notary or by a respectable citizen of the place of
dishonor of the bill in the presence of two or more credible witnesses.
It must be annexed to the bill, or must contain a copy thereon, and must
specify
(1) the time and place of presentment;
(2) the fact that presentment was made and the manner thereof;
(3) the cause of protest;
(4) the demand made and answer given, or that the drawee or the acceptor
could not be found.

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1007-Negotiable Instruments
When Protest Dispensed with
Protest is dispensed with in those cases where notice of dishonor is dispensed
with.

DISCHARGE OF THE INSTRUMENT AND OF THE PARTIES


Causes for Discharge of the Instrument and Discharge of All Parties
(1) Payment by the debtor;
(2) Payment by the accommodated party;
(3) Intentional cancellation by the holder of the instrument;
(4) Any other act discharging a simple money obligation; and
(5) Debtor becomes holder of the instrument at or after maturity in his own
right.
Causes for Discharge of Secondary Parties (Bar 1973)
(1) Any act discharging the instrument;
(2) Cancellation of indorsers signature by the holder;
(3) Discharge of a prior party.

FOREIGN BILLS
Acceptance for Honor (Acceptance Supra Protest) Defined
It is an undertaking by a stranger to the bill after protest, for the benefit
of all parties subsequent to the person for whose honor it is accepted, and
conditioned to pay the bill when it becomes due, if the original drawee does
not pay it.
Payment for Honor (Payment Supra Protest) Defined
A payment for honor is a payment made through a notarial act of honor of a
party liable under, or a stranger to the bill after, said bill had been
dishonored by non-payment by the acceptor and protested for non-payment by the
holder.
Legal Consequences
(1) all parties subsequent to the party for whose honor payment is made
are discharged; and
(2) the payer for honor is subrogated and succeeds to both.
The rights
and duties of the holder, as regards the party for whose honor payment
is made, and all parties liable to the latter.

Bills in Set defined

A bill in a set is a bill of exchange drawn in several parts, each part of the
set being numbered and containing a reference to the other parts, the whole of
the parts constituting just one bill.
Liability under the Bill
The acceptance and payment of one part discharges all parts, as a general
rule.
There are, however, instances where more than one liability may attach to the
whole of the set, and these are:
(a) where more than one part is negotiated by the same holder; and
(b) where the drawee accepts one part, but pays the unaccepted part.

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1007-Negotiable Instruments

CHECK
Check Defined
A check is a bill of exchange drawn on a bank and payable on demand.
Difference between a check and an ordinary bill of exchange
1. As to drawee

Check
Always a bank

Ordinary Bill
Any capacitated person

2. As to demandability

Always payable on demand

A bill need
payable

3. As to discharge of
indorsers and drawer

A certified check or
accepted, the drawer and
indorsers are
discharged.

The drawer and indorsers


remain liable.

not

be

so

Dishonor of Funded Checks (Bar 1986)


The depositor has a right of action against the bank for refusal to encash
checks which are fully funded.
Stop Payment Order by Drawer (Bar 1991, 1979)
A check by itself does not operate as an assignment of any part of the funds
to the credit of the drawer with a bank. Before the bank accepts or certifies
the check, the drawer may countermand or stock payment of a check issued by
him.
If the bank for any reason, and in spite of said stop payment order,
allowed then it becomes liable to the drawer or to any subsequent lawful
holder.
Certified Check
It is an agreement whereby the bank binds itself to pay the check at any
future time when presented for payment.
Effect of Certification (Bar 1998, 1970, 1965)
The certification is equivalent to an acceptance of the check by the drawee
bank, and the drawer and the indorsers are discharged from liability thereon.
Check used as payment of Obligation (Bar 1960)
The obligation to pay a sum certain in money may be paid in money, which is
the legal tender, or by the use of a check. A check is not a legal tender,
and therefore cannot constitute valid tender of payment. Since a negotiable
instrument is only a substitute for money and not money, the delivery of such
as instrument does not, by itself, operate as payment.
Crossed Checks Defined (Bar 1996, 1995, 1994,1991, 1965)
A crossed check is a check which in addition to the usual contents of an
ordinary check contains also the name of a certain banker or business entity
through whom it must be presented for payment. The bankers or entitys name
is usually stamped across the face of the check.
How made
Crossing of a check is usually done by placing two parallel lines diagonally
on the left top portion of the check.

Cabarles Notes

37

1007-Negotiable Instruments
Effects of a crossed Checks
The effects of crossing a check are as follows:
(1) the check may not be encashed but only deposited in a bank;
(2) the check may be negotiated only once to one who has an account with
a bank;
(3) the act of crossing a check serves as a warning to the holder that the
check has been issued for a definite purpose so that he must inquire if
he has received the check pursuant to that purpose.

Cabarles Notes

38