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Negotiable Instruments and Credit Transactions BUSLAW4

REVIEWER

THE NEGOTIABLE INSTRUMENTS LAW What are some examples of a negotiable instrument?
REPUBLIC ACT NO. 2031
Promissory note
This act is only applicable to negotiable instruments, a kind Bill of exchange
of commercial paper. Certificate of deposit
Bank note
Commercial paper written contractual obligations that Due bill
arise out of commercial transactions from the use of Bond
instruments, and may either be negotiable or non- Draft
negotiable such as: promissory notes and bills of
Trade acceptance
exchange.
Bankers acceptance
What are the functions of negotiable instruments? Memorandum check
Cashiers check
1. It is used as a substitute for money, thus it does Managers check
not constitute legal tender. Travelers check
a. It is defined with a characteristic of Certified check
negotiability which allows it to be passed
from one to another in the commercial What are some examples of a non-negotiable
industry, and thereby facilitates trade. instrument?

2. It is used as the media of exchange for most Letter of credit


commercial transactions. Treasury warrant
a. It increases the purchasing medium in Postal money order
circulation as it is used as a substitute for Bill of lading
money, the need of the Bangko Sentral ng Certificate of stock
Pilipinas (BSP) to produce more bills and Warehouse receipt
coins is then decreased.
b. The need to physically count cash as What is a non-negotiable instrument?
used as a mode of payment is avoided.
A non-negotiable instrument is an instrument which has
3. It serves as a medium of credit transaction. not met all the requirements laid down by the Act, or an
a. Negotiable instruments may be instrument which has lost its negotiability.
considered as a persons personal
property which is then used as a measure An example of the former situation would be a check or a
of his credit. promissory note payable only to a specific person. On the
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The Law on Negotiable Instruments 2013 Edition
other hand, a negotiable instrument may lose its (Sgd.) Juana Reyes
negotiability through a restrictive indorsement which
prohibits its further negotiation. 4.

What is a promissory note? I promise to pay to bearer the sum of Ten Thousand Pesos
(Php 10,000.00) on or before September 09, 2015.
A negotiable promissory note (also referred to as: promise
paper or two-party paper) is an unconditional promise in (Sgd.) Juana Reyes
writing made by one person (maker) to another (payee),
signed by the former, engaging to pay on demand or at a NOTE: The phrases to the order of or or order is
fixed or determinable future time, a sum certain in money necessary in able to constitute negotiability. Likewise, in
to order or to bearer. order for it to be a promissory note, the maker should
indicate a promise that he will pay.
Sample illustrations of a promissory note.
What is a bill of exchange?
1.
05 July 2015 A negotiable bill of exchange (also referred to as: order
paper or three-party paper) is an unconditional order in
I promise to pay to the order of Juan Dela Cruz the sum of writing addressed by one person (drawer) to another
Ten Thousand Pesos (Php 10,000.00) on or before (drawee), signed by the former, and requiring the latter to
September 05, 2015. pay upon demand or at a fixed or determinable future time
a sum certain in money to order or to bearer (payee).
(Sgd.) Juana Reyes
Sample illustration of a bill of exchange.
2.
05 July 2015
I promise to pay to the order of Juan Dela Cruz or bearer Manila
the sum of Ten Thousand Pesos (Php 10,000.00) on or
before September 09, 2015. Thirty days after date, pay to Alfredo M. Almeda or order
the sum of Ten Thousand Pesos (P10,000.00). Value
(Sgd.) Juana Reyes received and charge the same to the account of
3.
(Sgd.) Juana Reyes
05 July 2015
To Domingo M. Lantican
Three months after date, I promise to pay to the order of College, Los Banos
Juan Dela Cruz the sum of Ten Thousand Pesos (Php Laguna
10,000.00) on or before September 05, 2015.

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What are the requirements of a negotiable instrument? the full name or surname of the maker/drawer appears in
his signature. Initials or any mark will be sufficient as it acts
1. it must be in writing and signed by the as a substitute of a signature and that the maker/drawer
maker/drawer; intended to be bound.

2. must contain an unconditional promise/order to What does the requirement containing an


pay a sum certain in money; unconditional promise/order to pay a sum certain in
money mean?
3. must be payable on demand or at a fixed
determinable future time; Money, in its literal sense, means cash which may
denominated by all legal tender authorized and accepted
4. must be payable to order or bearer; by the government. Thus, the note or bill may have a
stipulation of a particular currency in which payment is to
5. if the instrument is addressed to a drawee, he shall be made.
be named or indicated with reasonable certainty.
Legal tender is the currency which a debtor can legally
Unlike in bills of exchange, promissory notes have no compel a creditor to accept in payment of a debt in money
drawee; however, its payee shall be likewise identified. when tendered by the debtor in the right amount.

NOTE: Numbers (1) to (4) are necessary for the NOTE: If the instrument calls for an act, other than the
negotiability of both promissory notes and bills of payment of money, it is considered to be non-negotiable.
exchange, while (5) is only necessary for the latter.
The sum payable shall be identified as a fixed amount or
What does the requirement being in writing and signed coupled with permissible clauses, which effect is deemed
by the maker/drawer mean? to be certain/fixed as well although it is paid:

The instrument must be in writing or reduced in tangible 1. with interest;


form, thus if it is in print, it may still be considered as a a. at a fixed rate;
negotiable instrument. b. at an increased or decreased rate, where
the increase in the interest is a penalty
NOTE: Obligations contracted orally are not considered as
negotiable. 2. by stated installments;

The instrument must be signed by the maker or drawer at NOTE: the interest of each installment and the due date of
the lower right hand corner as a general rule. However, it each installment must be fixed in the instrument
may be signed in any part thereof as long as it appears
that the person intended to be bound. 3. by stated installments with acceleration clause;
Signature is a prima facie evidence of ones intention to be
bound and is presumed valid. In addition, it is preferable if

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NOTE: An acceleration clause is a provision that, upon
default in the payment of any installment or interest, the The note must be payable absolutely. Thus, it may not be
whole shall be due subject to any condition or contingency except implied
conditions of presentment, protest, and notice of dishonor.
NOTE: The payee or holder cannot accelerate the note
unless the maker fails to pay an installment. A promise is unconditional although it is coupled with:
1. an indication of a particular fund out of which
NOTE: If a note provides for acceleration at the option of reimbursement is to be made or a particular
the holder, the instrument is non-negotiable. account to be debited with the amount; or
2. a statement of the transaction which gives rise to
4. with exchange; the instrument
a. at a fixed rate;
b. at a current rate NOTE: An order or promise to pay out of a particular fund
is not unconditional.
NOTE: Exchange represents the charge for the expense
of providing funds at the place where the instrument is NOTE: The test of negotiability is whether the instrument
payable to meet the instrument which is issued at another carries the general personal credit of the maker/drawer.
place.
NOTE: If the order or promise is subject to terms and
NOTE: This provision apples to instruments drawn in one conditions of another contract, it is non-negotiable.
country and payable in another; thus exchange is
applicable only to foreign bills. What does the requirement being payable on demand
or at a fixed determinable future time mean?
5. with costs of collection or attorneys fee
It is essential for an instrument to be payable at all events.
NOTE: If the cost cannot be ascertained from the face of An instrument may be:
the instrument, it consequently renders the instrument 1. payable at a fixed time;
non-negotiable.
2. payable at a fixed period after date;
NOTE: If attorneys fee is unconscionable, it can be
reduced by the courts. If it is not stipulated, then it shall be 3. payable at a fixed period after sight;
a reasonable sum.
NOTE: After sight means after the instrument is seen by
The rule as to meet the requirement of sum certain is that the drawee upon presentment for acceptance or accepted
the holder can determine from the instrument itself the by the drawee.
amount he is entitled to receive at maturity.
4. payable on or before a fixed time;
NOTE: A promissory note giving the maker the right to
ascertain the amount rightly payable is non-negotiable. NOTE: Payee cannot demand payment before maturity.

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5. payable on or before a determinable future time; It may be drawn payable to the order of:
1. a payee who is not the maker, drawer, or drawee;
NOTE: Determinable future time means that the time can 2. drawer or maker;
be determined with certainty after the execution of the 3. drawee;
instrument 4. two or more payees jointly;
5. one or more several payees;
6. payable on the occurrence of a specified event; 6. holder of an office for the time being

7. payable after the occurrence of a specified event. The standard words of negotiability are:
1. to the order of;
NOTE: An instrument payable upon a contingency is non- 2. or order;
negotiable as contingency is, in law, an uncertain event 3. or bearer;
which may or may not happen. 4. to bearer;
5. or other equivalent words that would render the
An instrument is then payable on demand where: same meaning.
1. it is expressed to be payable on demand, or at
sight, or on presentation; or What does the requirement being payable to bearer
2. in which no time for payment is expressed. mean?

NOTE: An instrument payable on demand is due and The instrument is payable to bearer when:
demandable immediately after delivery. 1. it is expressed to be payable to bearer;

NOTE: An overdue instrument is necessarily a demand 2. it is payable to a person named therein or bearer;
paper.
3. it is payable to the order of a fictitious person;
NOTE: At sight is used as the instrument is payable as it
seen by the party primarily liable; and is primarily used in NOTE: A name is fictitious when it is feigned or pretended.
bills of exchange, while on demand is used on 4. it is payable to the order of a non-existing person;
promissory notes. 5. the name of the payee does not purport to be the
name of any person;
What does the requirement being payable to order
mean? 6. the only or last indorsement is blank.

An instrument is payable to order where it is drawn payable


to the order of a specified person, or to him or his order.
What is the rule with regard to dates?
NOTE: An instrument payable to a specific person is non-
negotiable.

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Omission of the date will not render the instrument non- Instrument may only be enforced against a party prior to
negotiable. However, the insertion of wrong date complete if filled up strictly in accordance with the authority
constitutes material alteration. given and within reasonable time.

If the date stated cannot be found in the calendar, the law Defense that the instrument had not been filled up in
will deem the nearest date of the month intended. accordance with the authority given within a reasonable
time is a personal defense. It is not available against a
If the instrument bears a date, it is presumed that said date holder in due course.
is the date when it was made by the maker, drawn by the
drawer, accepted by the drawee, or indorsed by the payee What is the rule for undelivered incomplete
or holder. instruments?

Dates may be inserted where an instrument expressed to If an incomplete and undelivered instrument is completed
be payable at a fixed period after date is issued undated, and negotiated without authority, the contract is invalid
or where the acceptance of an instrument payable at a against any holder, as it is considered to be a real defense.
fixed period after sight is undated.
The invalidity is only with reference to the parties whose
NOTE: The insertion of a wrong date does not avoid the signatures appear on the instrument before delivery.
instrument in the hands of a subsequent holder in due
course; but as to him the date so inserted is to be regarded What is the rule for complete instruments which is
as the true date. delivered?

What is the rule for incomplete instruments which is A complete instrument is considered to be incomplete and
delivered? revocable until its delivery.

The holder has prima facie authority to complete an If a complete instrument is found in possession of an
incomplete instrument by filling up the blanks with the immediate or remote party other than a holder in due
material particulars. However, it should be noted that the course, there is a prima facie presumption of delivery.
authority to complete is not an authority to alter.
NOTE: Immediate parties are those who held to know of
NOTE: Material particular pertain to any particular proper the conditions or limitations placed upon the delivery of the
to be inserted in a negotiable instrument to make it instrument, while remote parties are those who are not in
complete. direct contractual relation to one another.

A signature on a blank paper which is to be converted into If a complete instrument is found at the hands of a holder
a negotiable instrument operates as a prima facie authority in due course, it is presumed that there is a valid delivery
to fill it up as such for the amount considered. by all parties prior to him.

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What are the rules on construction?
The general rule is that only those persons whose
These rules are only applicable ton instruments which are signatures appear on an instrument are liable thereon.
ambiguous and have omissions.
1. when there is a discrepancy between the sum However, one who signs in a trade or assumed name is
expressed in words and the sum expressed in liable as id he signed his own name.
figures, the former prevails;
An agent signing in behalf of his principal is not liable in the
2. when the words are ambiguous or uncertain, instrument if: (1) he is duly authorized; (2) he indicates that
reference may be had to the figures; he is an agent; and (3) he discloses his principal.

3. if the date when the stipulated interest is to run is A signature by procuration operates as notice that the
not specified, the interest runs from the date of the agent has but a limited authority to sign, and the principal
instrument or if undated, from the date of its issue; is bound only in case the agent in so signing acted within
the actual limits of his authority.
4. an undated instrument is considered to be dated
as of the date of its issue; NOTE: Procuration is the act by which a principal gives
power to another to act in his place as he could himself.
5. in case of conflict between the written and printed
provision, the former prevails; or What is rule with regard to minority?

6. in case of doubt as to whether the instrument is a As a general rule, contracts entered into by a minor are
bill or note, the holder may treat it as either at his voidable. It should be noted that minority is a real defense,
election; as well as being deaf-mute and insane.

NOTE: A bill may be treated as a note when: (1) the drawer While a minor is not bound by his indorsement for lack of
and the drawee are the same person; (2) drawee is a capacity, he is however, not incapacitated to transfer
fictitious person; (3) the drawee has no capacity to certain rights.
contract.
A minor may be held bound by his signature in an
7. in case of doubt in what capacity the person place instrument where he is guilty of actual fraud committed by
his signature, he is deemed to be an indorser; specifically stating that he is of age when in fact he is not.

8. an instrument with words I promise to pay gives What is rule with regard to forgery?
rise to solidary liability, and an instrument with
words we promise to pay gives rise to joint Forgery is the counterfeit-making or fraudulent alteration of
liability. any writing, any may consist in the signing of anothers
name or the alteration of an instrument in the name,
What is rule with regard to signatures?

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amount, description of the person and the like, with intent
thereby to defraud. What is consideration?

Forgery is a real defense and is not presumed. Consideration, otherwise known as cause, is the
immediate, direct, or essential reason which induces a
Those persons precluded from setting up the defense of party to enter into a contract.
forgery are those: (1) who by their acts, silence, or
negligence, are estopped from setting up the defense of It is not necessary, however, that the consideration be
forgery; and (2) who warrant tor admit the genuineness if expressly stated in the instrument. The presumption is that
the signatures in question (i.e: indorsers, acceptors, it has been issued for a valuable consideration.
persons negotiating by delivery)
What constitutes value?
Where the note is payable to order, the party whose
indorsement is forged is not liable to any holder, even a Value is any consideration sufficient to support a simple
holder in due course. Parties prior to the forgery are also contract. It need not be adequate; it is sufficient it is a
not liable. valuable one. Furthermore, an antecedent or pre-existing
debt constitutes value.
Where the note is payable to bearer, the party whose
indorsement is forged, is liable to a holder in due course. What does lien on instrument means?
Parties prior to the forgery can also be held liable by the
holder. One who has taken a negotiable instrument as collateral
security for a debt has a lien on the instrument.
Where the bill is payable to order, the party whose 1. if the amount of instrument is more than the debt
signature is forged is not liable to any holder. If the drawee secured by such instrument, the pledgee is a
pays under a forged indorsement, the drawer is not liable holder for value to the extent of his lien
to the bill and the former may not debit the drawers 2. if the amount of instrument is less that or the same
account. as the debt secured by such instrument, the
pledgee is a holder for value for the full amount
A bank who pays a forged check cannot charge the and may recover all
amount paid to the depositors account, as they are bound
to know their clients signature. What is an accommodation party?

Where the checks are for collection and deposit, the ban is Accommodation party is one who has signed the
not expected to ascertain the genuineness of all prior instrument as maker, drawer, acceptor, or indorser,
indorsements. without receiving value therefor and for the purpose of
lending his name to another party, which is known to be
Where the bill is payable to bearer, the drawee may debit the accommodated party. It is essentially a loan of ones
the drawers account in spite of the forged instrument. credit.

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NOTE: As stated by the Supreme Court, the meaning of
without receiving value therefore does not mean that as 2. Negotiation refers to the subsequent transfers of
one to be classified as an accommodation party means an instrument to another
that one should not, in any case, receive any payment (e.g: 3. Assignment an act done by an assignor in which
lending his name). It only means that one should not one only transfers his title or rights over an
receive payment for the negotiable instrument. instrument to an assignee

What are the differences between an accommodation NOTE: The transfer of a non-negotiable instrument always
party and a regular party? constitute an assignment

Accommodation party Regular party NOTE: While a negotiable instrument may be transferred
signs an instrument signs an instrument for through the three methods mentioned, a non-negotiable
without receiving value value instrument may only be assigned.
therefore
sign an instrument for the signs an instrument does NOTE: In cases of re-acquisition by the payee,
purpose of lending his not sign for such purpose indorsement by the last holder is not necessary in order for
name the payee to acquire title over the instrument since the
may always show parol cannot limit his personal payee is remitted to his former rights, and has no right to
evidence that he is only an liability as appearing on claim payment from any intervening parties after paying
accommodation party the instrument by parol the holder for the value thereof.
evidence
cannot avail of the defense may avail of such defense What are the differences of negotiation and
of absence or failure of against a holder not in due assignment?
consideration against a course
holder not in due course Negotiation Assignment
may reimburse from the cannot sue any only for negotiable
generally for ordinary
accommodated party the subsequent party for any instruments contracts
amount after paying the reimbursements transferee is a holder transferee is an assignee
holder a holder in due course is an assignee is subjected
subjected only to real to real and personal
How is an instrument transferred? defenses defenses
a holder in due course an assignee only places
The act of transferring an instrument may be done through: may acquire better title or
himself in the position of
1. Issuance it is the first delivery of a complete rights than those parties the assignor acquiring
instrument to its payee/drawee/holder prior to him only the titles or rights the
latter has
NOTE: A holder is the payee or indorsee (the one who a general indorser an assignor does not
received an instrument indorsed by an indorser) of a bill or warrants the solvency of warrant solvency unless
note, who is in possession of it, or the bearer thereof prior parties
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expressly stipulated or the Indorsement must be of the entire instrument since there
insolvency is known to him cannot be partial delivery of one instrument. However, if
an indorser is not liable an assignor is liable even part of the amount has been paid by the indorsee, the
unless there be without notice of dishonor unpaid balance may then be indorsed to a subsequent
presentment and notice of indorsee, making the former indorsee as an indorser.
dishonor
governed by the governed by Articles 1624 As it is a rule that the entirety of the instrument should be
Negotiable Instruments to 1635 (Assignment of indorsed, the indorsement to two or more persons, who are
Law Credits) of the Civil Code independent parties apart from one another, does not
operate as a negotiation unless these parties are joint
How is transferring through negotiation made? payees.

1. instruments payable to order: there shall first be In cases of alternative indorsees, the indorsement may be
an indorsement made by the payee/holder made upon either one of them.
followed by a delivery
Where should the signature for indorsement be
NOTE: Without the indorsement or the delivery, the placed?
transfer operates as an assignment.
1. on the instrument itself
2. instruments payable to bearer: delivery alone is
sufficient a. at the back the term indorsement is derived
at a Latin word: indorsa which means writing
NOTE: Delivery is the transfer of possession, actual or on the back
constructive, from one person to another. b. on the face any corner thereof as its
interpretation be based on the intention of the
NOTE: Delivery shall be voluntary in manner. party signing it

How is indorsement made? 2. a separate paper attached thereto this separate


paper is known as allonge
It is made by the payee/holder through signing his name
on the instrument with the intent of transferring his title or NOTE: The signature of the indorser is what is important
strengthening the security of the indorsee/subsequent as the first pre-requisite in any indorsement, without such
holders by assuming a contingent liability for its future there is no indorsement.
payment. What are the kinds of indorsements?

Each negotiation done by indorsement creates a new 1. as to methods of negotiation:


contract between and among the parties.
a. Special - an indorsement where the name of
the indorsee is specified

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NOTE: It is also referred to as: specific indorsement and a. Pay to A for collection the indorsee, A,
indorsement in full does not acquire title over the instrument,
for he merely serves as the agent of the
a. Blank an indorsement where there is no indorser and is bound to act within the
specific indorsee, and which only consists limitations prescribed to an agent in this
of the signature of the indorser case, to collect. With this indorsement, it
NOTE: A blank indorsement made subsequently to an prohibits A to further negotiate the
order instrument originally with a special indorsement, instrument.
converts the instrument into a bearer instrument. However, 3. vests the title in the indorsee in trust for or to the
a bearer instrument will always remain to be a bearer use of some other person;
instrument, regardless of any indorsement. a. Pay to A as trustee for B This
indorsement destroys the negotiability of
NOTE: A blank indorsement may be converted into a the instrument
special indorsement by writing over the signature of the b. Pay to A or order as trustee for B
indorser in blank as long as it does not alter the However, by adding the phrase or order,
indorsement in any respect. the indorsee, B, may still negotiate the
instrument
2. as to the kind of title transferred:
b. Non-restrictive
a. Restrictive destroys the negotiability of
the instrument even against a holder in 3. as to scope of liability of indorser:
due course
a. Qualified an indorsement which
NOTE: An indorsement is considered restrictive when it: constitutes the indorser a mere assignor
1. prohibits the further negotiation of the instrument; of the title to the instrument. It is done by
a. Pay to A and Pay to A or order adding the phrase without recourse or
operates the same even the phrase or other words with the same effect
order is absent in the first example as it
must be noted that such is written for the NOTE: Recourse means a resort to a person who is
purposes of an indorsement only. secondarily liable after the default of the person who is
Furthermore, these indorsements do not primarily liable.
destroy the negotiability of the instrument.
b. Pay to A only By adding the word NOTE: Thus, a qualified indorser is exempted from
only, the negotiability of an instrument is incurring any liability (e.g.: being bound to pay a
then destroyed. dishonored instrument), other than being secondarily liable
for breach of warranties.
2. constitutes the indorsee as the agent of the
indorser; b. Unqualified or general

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NOTE: A general indorser is guaranteed and liable to the failure of prior parties, and of due
make payment if the holder is unable to obtain payment notice to him of such failure
from the maker/acceptor at maturity.
5. other kinds of indorsements:
4. as to presence or absence of limitations:
a. Joint
a. Conditional an indorsement by which an b. Successive
indorser imposes some other condition to c. Irregular or anomalous
his liability, or on the indorsees right to d. facultative
collect payment
How is indorsement made for an instrument payable
NOTE: This indorsement does not destroy negotiability, to two or more payees jointly?
regardless, of whether the condition has been fulfilled or
not. Indorsement of an instrument payable to two or more
M makes a note for Php 10,000 payable to P or persons who are not partners, must be of all indorsers
order. P then indorses the note to A as follows: unless the one indorsing has the authority to indorse for
Pay to A if he passes the CPA examination. the others.
(Sgd.) P.
What is the effect of an indorsement made to or by a
If A has not passed the CPA examination on the cashier or other fiscal officer of a corporation?
date of maturity, M may refuse to pay the same as
the condition has not yet fulfilled. An indorsement made to or by a fiscal officer or any other
duly authorized officer of a corporation is a valid, unless
However, M, as the principal debtor, may, in his the officer acted beyond his limits.
discretion, disregard the condition and pay the
same to A. M has the right to terminate his How should a misspelled name of an indorsee be
obligation upon maturity and cannot be burdened corrected?
with conditions which were not part of his contract.
An indorsement with the misspelled name of an indorsee
Upon payment of M, A holds the payment in trust is valid, and may be corrected by: (1) doing nothing; or (2)
for P, and will not become the owner thereof as adding the proper name and signature as well.
the condition is not yet fulfilled.
May an instrument be indorsed through an agent?
If the condition is not complied with, A must return
the payment to P. An indorsement may be done by the indorser personally or
through his appointed agent. It shall also be noted that the
b. Unconditional an indorsement by which authority of an agent need not to be in writing.
the indorser absolutely binds himself to
pay upon no other condition, other than What is the effect of an undated indorsement?

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If the indorsement is undated, the presumption is that it 1. Contrary/Negative view the holder in due course
was negotiated before maturity. On the other hand, if the should be the person to whom it is originally
indorsement is dated, the presumption is that it is the true issued, hence the original payee
date. 2. Affirmative view the holder in due course may be
the person other than the original payee to whom
Moreover, every indorsement is presumed to have been the instrument is negotiated for
made at the place where the instrument is dated. Is it possible to be a holder in due course when an
instrument is negotiated without notice of dishonor?
What is the effect of striking out indorsements?
Yes, as long as the holder does not know that the bill has
The holder has the option of striking out indorsements not been previously dishonored.
necessary to his title. Thus, an indorser whose
indorsement is struck out, and all indorsers subsequent to May an instrument be negotiated after its maturity date
him, is relieved from liability. However, in the case of an or dishonor?
instrument made payable to order, the holder should not
strike out the payees indorsement as it is necessary to his Yes. An overdue or dishonored instrument may still be
title. negotiated in the same manner of a regular negotiable
instrument. However, the holder of an overdue instrument
What is a holder in due course? cannot attain the status of a holder in due course, unlike
that of a dishonored instrument as explained above.
A holder in due course accepts the instrument upon What is a holder for value?
concurrent on the following conditions:
1. that it is complete and regular upon its face; A holder for value is a holder to whom the instrument was
2. that he became the holder of it before it was negotiated for any consideration sufficient, and not merely
overdue, and without notice that it had been adequate, to support a simple contract. But it shall be
previously dishonored noted that love and affection do not constitute value within
3. that he took it in good faith and for value; the meaning of the law.
4. that he had no notice of any infirmity in the
instrument or defect in the title of the person May a holder be automatically deemed as a holder not
negotiating it as the time it was negotiated to him in due course?

Every holder is deemed prima facie a holder in due course. Yes. Where an instrument is payable on demand is
negotiated in an unreasonable length of time after its
The holder of a non-negotiable instrument and a drawee, issuance, the holder is deemed not be a holder in due
by paying a bill, cannot attain the status of a holder in due course.
course as he is a mere assignee.
However, if the transferee receives notice of any infirmity
NOTE: There is a marked conflict of opinion on this point: on the instrument or defect in the title of the person
negotiating the same before he had paid the full amount

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therefore, he will be deemed as a holder in due course only 2. he may receive payment and if the payment is in
to the extent of the amount paid by him. due course, the instrument in discharged;
3. he holds the instrument free from any defect of
Furthermore, if the transferee receives notice of such title of prior parties;
before making any payments, he is relieved from the 4. he holds the instrument free from personal
obligation to make payment. If he does pay, he is not a defenses of prior parties;
holder in due course. 5. he may enforce payment of the instrument for the
full amount thereof against all parties liable
When is a title defective? thereon.

The title of a person is defective when he obtained the What constitutes payment in due course?
instrument or any signature thereto by fraud, duress, force,
or other unlawful means, or for an illegal consideration. Payment must be made:
Likewise, ones title is defective when he negotiated the 1. at or after the date of maturity;
instrument in breach of faith, or under any circumstances 2. to the holder;
amounting to fraud. 3. in good faith and without notice that the holders
title is defective.
What constitutes notice of defect?
When is an instrument considered to be discharged?
In order to constitute notice, the transferee must have
actual knowledge of the defect, or knowledge of such facts Discharge of an instrument means a release of all parties
(which do not appear on the face of the instrument) that his from the obligations arising from the instrument, rendering
action in taking the instrument amounts to bad faith. Thus it without force and effect, and, consequently, no longer
mere suspicions are not enough. negotiable.

NOTE: If the holder had actual knowledge of any An instrument is considered to be discharged:
suspicious circumstances, coupled with the means of 1. by payment in due course by or on behalf of the
readily informing himself of the facts and he willfully principal debtor;
abstained from making inquiries, his intentional ignorance 2. by payment in due course by the party
may amount to bad faith. (De Ocampo & Co. v. Gatchalia, accommodated, where the instrument is made or
3 SCRA 596; Sec. 52 [c].) accepted for accommodation;
3. by the intentional cancellation thereof by the
NOTE: Negligence itself is not sufficient to constitute holder;
notice. 4. by any other act which will discharge a simple
contract for the payment of money; or
What are the rights of a holder in due course? 5. when the principal debtor becomes the holder of
the instrument at or after maturity in his own right.
1. he may sue on the instrument in his own name;
What are defenses?

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acquisition of the instrument itself by duress, or
Defenses are grounds or reasons pleaded or offered by force and fear
the defendant in a case, showing why the plaintiff should acquisition of the instrument by unlawful means
not be given the relief he seeks. acquisition of instrument for an illegal
consideration
There are two kinds of defenses: negotiation in breach of faith
negotiation under circumstances that amount to
1. Real defenses assertable against to all fraud
parties as it challenges the validity of the innocent alteration or spoliation
instrument itself regardless of the merits or set-off between immediate parties
demerits of the holder
discharge by payment or renunciation or release
before maturity
Examples:
discharge of party secondarily liable by discharge
incapacity
of prior party
illegality of contract as declared by law except
want of authority of the agent who has apparent
where the maker/drawer is a party to its illegality
authority, but if the principal can show that the
want of delivery of incomplete instrument agent had no express, implied, or apparent
forgery authority to sign, the dense is real
want of authority, apparent and real
duress amounting to forgery What is the difference between fraud in the execution
fraud in the execution and fraud in inducement?
fraudulent alteration by holder
prescription Fraud in the execution (otherwise known as: fraud in
other infirmities appearing on the face of the factum or fraud in esse contractus) exists where a person,
instrument without negligence, has signed an instrument which was in
discharge at or after maturity fact, a negotiable instrument, but was deceived as to the
character of the instrument, as the instrument to which the
2. Personal defenses assertable against prior signor was believed to be signing is a deed or any other
parties other than a holder in due course document.

Examples: On the other hand, fraud in inducement (otherwise known


filling of wrong date as: simple fraud) relates to the quality, quantity, value, or
filling up of blanks not in accordance with the character of the consideration of the instrument.
authority given and within reasonable time
want of delivery of complete instrument What is spoliation?
absence or failure of consideration
fraud in inducement Spoliation is an alteration made by a stranger to an
instrument.

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NOTE: If an altered instrument is negotiated to a holder in b. acceptor
due course, he may enforce payment thereof according to c. certifier of a check
its original tenor (amount) regardless of whether the 2. secondarily liable
alteration was innocent or fraudulent. a. drawer
b. indorser
3. not liable
a. drawee until he accepts the instrument in
which case he becomes an acceptor
What constitutes material alteration? What distinguishes primary party to secondary party?

An alteration is considered to be material when it changes A primarily liable party is one who is unconditionally bound
the: to pay the instrument upon its maturity, while a secondarily
liable party is conditionally bound.
1. date;
2. sum payable, either the principal or interest; What are the liabilities of a maker?
3. time or place of payment;
4. number or the relations of the parties; The maker engages to pay the note to the payee or to any
5. medium or currency in which payment is to be subsequent holder who is legally entitled to the instrument,
made; at its maturity date even if the holder does not make any
6. or which adds a place of payment where no place demands, according to its terms and subject to no
of payment is specified; condition.
7. or any other changes or additions which alter the
effect of the instrument in any respect What are the admissions of a maker?

What is the shelter rule? The maker admits that: (1) the payee exists; and (2) the
payee has the capacity to contract.
In the hands of any holder other than a holder in due
course, a negotiable instrument is subject to the same What are the liabilities of a drawer?
defenses as if it were non-negotiable. However, a holder
who derives his title through a holder in due course, and It shall be noted that the drawer is only secondarily liable
who is not himself a party to any fraud or illegality affecting to the holder, or to any subsequent indorser, thus the
the instrument, has all the rights of such former holder in drawer does not promise to pay the bill absolutely. He
respect of all parties prior to the latter. engages to pay after certain conditions are complied with,
to wit:
What are the classifications of parties according to 1. the bill is presented for acceptance or for
their liability? payment, as the case may be, to the drawee;
2. the bill is dishonored;
1. primarily liable 3. the necessary proceedings of dishonor are duly
a. maker taken:

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a. notice of dishonor is given to the drawee; When is a person considered to be an irregular or
b. in case of foreign bills, protest is made anomalous indorser?
followed by a notice of protest
When a person, who is not otherwise a party to an
NOTE: The phrase subsequent indorser refers to any of instrument as a maker, drawer, acceptor, or regular
the indorser between the drawer and the holder. They may indorser, places thereon his signature in blank before
be otherwise known as intervening indorser. delivery.

What distinguishes a drawer from a maker? What distinguishes a general indorser from an
irregular indorser?
Drawer Maker
issues a bill of exchange issues a promissory note General indorser Irregular indorser
secondarily liable primarily liable makes wither a blank or always makes a blank
can limit his liability; bound cannot limit his liability; special indorsement indorsement
conditionally bound unconditionally indorses the instrument indorses before its delivery
after its delivery to the to the payee
When is a person deemed to be an indorser? payee
liable only to parties liable to payee and
A person placing his signature upon an instrument subsequent to him subsequent parties unless
otherwise as a maker, drawer, or acceptor is deemed to be he signs for the
an indorser, unless he clearly indicates by appropriate accommodation of the
words his intention to be bound in some other capacity, but payee in which case he is
not by parol or extrinsic evidence. liable only to all parties
subsequent to the payee
NOTE: A person signing his name on the back of an
instrument is considered to be a general indorser. What are the liabilities of an acceptor?

What are the warranties of a general indorser? Once a drawee accepts, he becomes an acceptor. As he
virtually takes the same position of a maker, he engages
1. that the instrument is genuine and in all respects that he will pay it according to the tenor of his acceptance.
what it purports to be;
2. that he has goof title to it; What are the admissions of an acceptor?
3. that all prior parties had capacity to contract;
4. that the instrument, at the time of his indorsement, 1. the existence of the drawer, the genuineness of
is valid and subsisting. the drawers signature, and the authority to draw
the bill;
NOTE: The warranties of an irregular indorser are the 2. the existence of the payee and his then capacity
same as those of a general indorser to indorse.

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NOTE: The acceptor is precluded from asserting as a What is the procedure for receiving the payment
defense that the drawer is fictitious or non-existent, or that thereof on the instrument?
the drawers signature is a forgery, or that he has no funds
in his hands belonging to the drawer with which to pay the In practice, one demands payment to the debtor. However,
bill, or that the drawer has overdrawn his account, or that in the case of negotiable instruments, presentment for
the drawer has no capacity to contract or has no authority payment is not necessary in order to charge the
to draw the bill. maker/acceptor on the instrument since his liability is
absolute even as it is stipulated in the terms. Thus, the
NOTE: The acceptor does not admit the genuineness of holder can sue the maker/acceptor although no demand
the indorsers signature because it is only the signature of has been made on him, as soon as the date for payment
the drawer that he warrants. has passed without the instrument being paid.

When is a person considered to be a guarantor? However, if the instrument is, by its terms, payable at a
special place, and he is able and willing to pay it there at
A person who writes, in addition to his signature, on the maturity, the maker/acceptor cannot be considered in
back of an instrument I hereby guarantee payment of this delay as it is an equivalent to a tender or offer of payment.
instrument or payment guaranteed, or their equivalent, Is it necessary to demand for payment to those
indicates his intention to be bound as a guarantor rather secondarily liable as when the instrument was
than as an indorser. Furthermore, a party is liable only as previously dishonored by those primarily liable?
a guarantor if his indorsement is made for identification
only. Yes since they are obliged to pay only if the instrument was
dishonored.
As a guarantor, he is not discharged from liability even if
presentment or due notice of dishonor. In addition, unlike What is the effect of non-presentment to the person
an indorser, a guarantor is liable only subsidiarily after the primarily liable?
assets of the principal debtor have been exhausted.
The indorsers and drawer are discharged from their
When is a person considered to be a surety? secondary liability unless such presentment is excused
and dispensed with.
A person who writes his name on the back of an instrument
followed by the words as surety shows his intention to be When should presentment be made?
bound as a surety rather than as an indorser.
1. If the instrument is payable at a fixed or
As surety, he is primarily and absolutely liable with the determinable future time, presentment must be
principal debtor without benefit of exhaustion of the made on the date of maturity without any period
properties of the debtor and without also the necessity of of grace, unless expressly stipulated in the terms.
presentment or notice of dishonor.
NOTE: Presentment made before the maturity date is not
effective.

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2. If the instrument is payable on demand, How is presentment made?
presentment must be made within a reasonable
time after its issue, in the case of promissory Presentment is the act of the holder of exhibiting/showing
notes, and within a reasonable time after the last the instrument to the person primarily liable and
negotiation (or the last transfer of value) thereof, demanding payment thereof. Thus, such act requires a
in the case of bills of exchange. face to face demand and the physical exhibition of the
instrument itself to the maker/acceptor.
What constitutes sufficient presentment?
NOTE: Where the instrument is payable at a bank,
It should be made: presentment for payment must be made during banking
hours, unless the person to make payment has no funds
1. by the holder, or by his agent; or there to meet it any time during the day.
2. at a reasonable hour on a business day; or
3. at a proper place; or NOTE: If the person primarily liable fails to pay on the due
4. to the person primarily liable on the instrument, or date, the holder may still opt to present the instrument
if he is absent or inaccessible, to any person found during banking hours as to charge those persons
where the presentment is made secondarily liable.

What does proper place mean? What happens if the person primarily liable is dead?

Presentment is made at the proper place: 1. If a place of payment is stipulated, proceed to the
place stipulated therein.
1. where a place for payment is specified in the 2. If there is no place of payment stipulated,
instrument and it is there presented; presentment must be made to his personal
2. where no place of payment is specified, but the representative if such there be and if he can be
address of the person to make payment is given found (e.g: estate lawyer, agent)
in the instrument and it is there presented;
3. where no place of payment is specified and no How is presentment made to persons liable as
address is given and the instrument is presented partners?
at the usual place of business or residence of the
person to make payment; 1. If a place of payment is stipulated, proceed to the
4. in any other case if presented to the person to place stipulated therein.
make payment wherever he can be found or if 2. If there is no place of payment stipulated,
presented at his last known place of business or presentment must be made to any one of them,
residence. even if the partnership has been dissolved

NOTE: The rule is that subsection (1) must first be applied How is presentment made to joint debtors (several
before subsection (2). persons but not partners)?

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1. where after the exercise of reasonable diligence
1. If a place of payment is stipulated, proceed to the presentment as required by this Act cannot be
place stipulated therein. made;
2. If there is no place of payment stipulated, 2. where the drawee is a fictitious person;
presentment must be made to all of them 3. by waiver of presentment

Is there an instance when presentment is not required How is the waiver of presentment made?
in order to charge the drawer?
The waiver may be made before or after maturity; and it
Yes. Presentment need not to be done when: may be express or implied.
1. the drawer has no funds with the drawee unless
there is such an agreement existing between the Express waiver is done by writing Presentment waived or
drawer and the drawee that the drawee shall waiving demand and protest before the signature of the
honor the bill; drawer/indorser.
2. the drawer of a check has stopped payment
thereof; Implied waiver is manifested when the holder was led to
3. the drawer of a check has withdrawn all funds believe that presentment is waived or was prevented from
from the drawee bank treating the instrument as he otherwise would like.

Is there an instance when presentment is not required Illustration: An instance where the drawer
in order to charge the indorser? promised from time to time to pay a bill, making no
objection on the ground that the bill had not been
Yes, but only in cases of indorsers for whose an instrument presented to the drawee.
was made or accepted for his accommodation. The reason
for the rule is that the accommodated payee-indorser is the When is an instrument dishonored by non-payment?
real debtor and not the maker/acceptor.
1. it is duly presented for payment and payment is
Will a delayed presentment be valid? refused or cannot be obtained; or
2. presentment is excused and the instrument is
Yes, only when delay is excused or where delay is caused overdue and unpaid.
by circumstances beyond the control of the holder events
which could not be foreseen, or which, though foreseen NOTE: An instrument is considered to be dishonored
are inevitable. where, on presentment, the maker promises to pay after a
number of days later.
May presentment be dispensed with/set aside?

Yes, but only when:

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May the holder proceed to those persons secondarily
liable immediately after those persons primarily liable NOTE: A notice given by or on behalf of the holder inures
dishonored the instrument? to the benefit of:
1. all holders subsequent to the holder who has
Yes, an immediate right of recourse to all parties accrued given notice;
to the holder; thus the holder may present the instrument 2. all parties prior to the holder but subsequent to the
to those persons secondarily liable and demand for party to whom notice has been given and against
payment. whom they have a right of recourse

NOTE: Where a notice is given by or on behalf of a party


What is the effect of a maturity date falling upon a entitled to give notice, it inures to the benefit of the holder
Sunday or a holiday? and all parties subsequent to him.

The instrument then becomes payable on the next How is a notice of dishonor made?
succeeding business day. The same is true when the
maturity date falls upon a Saturday. However, in cases of A notice may be done through writing, orally, and in any
instruments payable on demand, the holder may also opt terms which sufficiently identify the instrument and indicate
to present the instrument before twelve oclock noon on that it has been dishonored.
Saturday when that entire day is not a holiday.
NOTE: It is sufficient that a written notice is not signed, yet
How is time computed for instruments payable at a an insufficient notice may be supplemented and validated
fixed period after date, after sight, or after the verbally.
happening of a specified event?
NOTE: A mere statement that the instrument is due and
Exclude the day from which time is to begin to run, and payable is held to be an insufficient notice.
include the actual date of payment.
If such notice if given by a notary public, it is called a
What is a notice of dishonor? protest. Such notice is only required for foreign bills of
exchange.
It is to inform the indorser/drawer of an instrument that a
specified negotiable instrument, upon proper proceedings What is the difference between an inland bill and a
taken, has not been accepted or paid and that the party foreign bill?
notified is expected to pay it.
Inland bill is a bill which on its face purports to be both
A holder may select to demand to only one or some of the drawn and payable within in the Philippines. While a
indorsers. Thus, any such person to whom such notice is foreign bill, is any other bill.
not given is discharged. However, it should be noted that
the indorser to whom notice is not given, is still liable for Who may give a notice of dishonor?
breach of warranties pertaining to the instrument.

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The notice may be given by:
1. the holder himself; Where should notice be given when a party sought to
2. the agent of the holder; be charged is bankrupt?
3. a party to the instrument who may be
compelled to pay it to the holder; Where a party has been adjudged a bankrupt or an
4. the agent of the party. insolvent, or has been made an assignment for the benefit
of creditors, notice may be given to the party himself or to
Thus, a notice of a stranger to the instrument is ineffectual his trustee or assignee.
and not binding.

NOTE: The agent giving a notice need not to be authorized


by the principal. However, it should be noted that an agent When should a notice be given?
receiving a notice must be duly authorized to render the
notice binding to the parties. It may be given as soon as the instrument is dishonored.
NOTE: Where parties reside in the same place:
Where should notice be given when a party sought to 1. if given at the place of business of the person to
be charged is dead? receive notice, it must be given before the close of
business hours of the day following;
The notice must be given to his personal representative 2. if given at his residence, it must be given before
provided that his death is known to the party giving notice, the usual hours of rest on the day following;
and if with reasonable diligence, the said personal 3. if sent by mail; it must be deposited in the post
representative could be found. office in time to reach him in usual course on the
day following.
If there be no personal representative, notice may be sent
to the last residence or last place of business of the NOTE: Where parties reside in different places:
deceased. 1. if sent by mail, it must be deposited in the post
office in time to go by mail the day following the
Where should notice be given when a party sought to day of dishonor, or if there be no mail, at a
be charged is a partnership? convenient hour on that day, by the next mail
thereafter
Notice may be given to any party even if the partnership 2. if given otherwise than through the post-office,
has been dissolved. then within the time that notice would have been
received in due course of mail
Where should notice be given when a party sought to
be charged is jointly liable? Is there an instance when notice is not required in
order to charge the drawer?
Notice to joint persons, who are not partners, must be
given to all unless one of them has authority to receive Yes. Notice need not be done:
such notice for the others.

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1. where the drawer and drawee are the same
person;
2. when the drawee is a fictitious or a person not
having capacity to contract;
3. when the drawer is the person to whom the
instrument is presented for payment;
4. where the drawer has no right to expect or require
that the drawee will honor the instrument;
5. where the drawer has countermanded (revoke)
payment

Is there an instance when notice is not required in


order to charge the indorser?

Yes. Notice need not be done:


1. when the drawee is a fictitious persons or a
person not having capacity to contract, and the
indorser was aware of that fact at the time he
indorsed the instrument;
2. where the indorser is the person to home the
instrument is presented for payment;
3. where the instrument was made or accepted for
his accommodation.

What is the Barrier Rule and the Jump over Rule?

The Barrier Rule states that a holder may not demand for
payment to the maker or drawer of the promissory note
because of certain stipulations at arise from transferring of
the instrument. Only applicable to real defense.

The Jump Over Rule states that a holder in due course


may demand for payment to the immediate parties.
Applicable to personal defense.

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