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 Non-negotiable Instruments

Contains all the requisites of Sec. 1.
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.
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
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)

Assignment Negotiation
Better right No better right than his transferor (if a holder in due course) may
acquire rights better than his
predecessors
Right of recourse Has no right of recourse for Can hold the drawer and the
payment against intermediate indorsers liable if the party primarily
parties. 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.

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.

Cabarles Notes 15
1007-Negotiable Instruments
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 Bill of Exchange

As to contents Unconditional promise Unconditional order

As to number of parties There are two original parties There are three

As to liability of original issuer
As to number of presentment
The original issuer is primarily liable
Only one presentment (for
payment) is needed.
The original issuer is secondarily
liable
Two presentments (for acceptable
and for payment) are generally
needed.

Cabarles Notes 16
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.
When payable to bearer. (Sec. 9.) (Bar 1980, 1960)
The instrument is payable to bearer
(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or bearer; or
(c) When it is payable to the order of a fictitious or non-existing person, and such fact was known to the person making it so
payable; or
(d) When the name of the payee does not purport to be the name of any person; or
(e) When the only or last indorsement is an indorsement in blank.
Cabarles Notes 18
1007-Negotiable Instruments

Omissions; seal; particular money (Sec. 6)

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

But nothing in this section shall alter or repeal any statute requiring in certain cases the nature of the consideration to be stated in
the instrument.

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.

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.

Cabarles Notes 19
1007-Negotiable Instruments
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 by the Abnormality or Deficiency
1. Incomplete and undelivered negotiable instruments (Sec. 15)
2. Signature of maker or drawer is forged

Exceptions: Where the forgery consists of an alteration of material particular in the instrument.

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.

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.

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1007-Negotiable Instruments
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.

Cabarles Notes 22
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 called the accommodation party lends his name and credit to another
called the accommodated party, without consideration.

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.

Cabarles Notes 23
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.

Cabarles Notes 24
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.

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.

Cabarles Notes 25
1007-Negotiable Instruments
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.

Cabarles Notes 26
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.

Cabarles Notes 27
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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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 When applicable

By delivery of the instrument Instrument is originally payable to bearer
alone
or

Originally payable to order where last indorsement is in black

By indorsement followed by Instrument payable to the order specified person.
delivery

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.

Cabarles Notes 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.

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)

Cabarles Notes 30
1007-Negotiable Instruments
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. Forgery 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

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.

Cabarles Notes 31
1007-Negotiable Instruments
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
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
Cabarles Notes 32
1007-Negotiable Instruments
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. The acceptance is qualified if it is:
(a) Conditional;
(b) Partial
(c) Local
(d) Qualified as to time
(e) 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.

Cabarles Notes 33
1007-Negotiable Instruments

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 non-payment 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 is given:
(1) by the holder or his agent, or by any party who may be compelled by the holder to pay;
(2) to the secondary party or his agent
(3) within the periods provided for by law and
(4) at the 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
(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 FOREIGN 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 is dishonored by non-acceptance it must be protested for non-acceptance. If dishonored by non-payment, it
must be protested for non-payment. If not so protested, the drawer and indorsers are discharged. It must be made on the day of
dishonor. There may also be a protest for better security.

How made (Bar 1948)

Cabarles Notes 34
1007-Negotiable Instruments
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.

Cabarles Notes 35
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.
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

Check Ordinary Bill

1. As to drawee Always a bank Any capacitated person

2. As to demandability Always payable on demand A bill need not be so payable

Cabarles Notes 36
1007-Negotiable Instruments

3. As to discharge of indorsers and A certified check or accepted, the The drawer and indorsers remain
drawer drawer and indorsers are liable.
discharged.

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