Pre-week in Commercial Law

By: Atty. Zarah Villanueva

Memorize Sec. 1 of Negotiable instruments Law

Whether or not the instrument is negotiable, rights created

Negotiability- Sec. 1 of nego law

What appears in the face of the instrument- determination of negotiability

1. In writing, signed by maker (PN) or drawer (BoEx)

2. Contain unconditional promise or order to pay a sum certain in money. Basic prestation on
the face of the instrument is payment of a sum certain in money. If instruments says that
goods are to be delivered, it doesn’t meet the requirements of negotiability.
3. Payable on demand or at a fixed or determinable future time. Payable on demand- at the
pleasure of the holder/creditor; fixed period- fixed date for payment; future time-
determinable future time as seen on the face of the instrument. In case of check (special bill
of exchange being always payable on demand)
4. Payable to order or bearer- instruments of negotiability
5. BoEx- drawee must be named in the instrument itself or identity is determinable on the face
of the instrument

Main functionality of nego instruments- substitute for money ( an alternative for money). Nego
instruments are not legal tender.

Kinds of nego instrument:

1. Promissory note- commitment to pay is personal to the maker of the note itself
2. Bill of exchange- one who makes the bill does not primarily make payment but another person is
ordered to pay.

PN- parties are debtor and creditor of each other

BoEx- drawee does not become a party, not bound to pay the holder until he accepts. Non-payment by
drawer is an act of dishonor, cannot compel the drawee to pay him. Unless the drawee previously
accepts.

Basic diff of nego and non-nego instruments- nego instrument, a holder has te right to collect payment.
If th one held is non-negotiable instrument, can enforce payment but being non-negotiable, doesn’t
meet the requirement of negotiability.

NOTE: Negotiability must not be equated with validity. Likewise, non-negotiability not equated with
invalidity. The instrument maybe non-negotiability, but creditor may still validly collect based on the
instrument.
Other non-negotiable instrument doesn’t have the concept of “holder in due course”- this apply only to
negotiable instrument, enforce payment with freedom to any possible defenses.

Sec. 52- memorize (requisites of a holder in due course)

The instrument is payable out of fund 501 but reimbursable out from the account of Mr. X. Non-
negotiable because under section 1, the instrument must comply with sec 1 which is payable out of
particular fund (unconditional promise to pay a sum certain in money)- payment out of fund 501,
payment is condition upon existence of fund 501 and whether it has sufficient fund to pay the
obligation.

Caltex case- negotiability is solely be decided on what appears on the face of the instrument.

Instrument made payable to bearer delivery suffices the negotiability.

Once a bearer instrument always a bearer. This refers to originally payable to bearer. Those originally
payable to order but transformed. Meaning, an originally bearer instrument which was in the midst, was
negotiated thru indorsement (even in case of indorsemtn in blank or special indorsemnet), can still be
negotiated further only thru indorsement.- apply to instrument originally payable to bearer

Instrument originally payable to order- depends:

1. If previous indorsement is in blank, delivery suffice to further negotiate it. Subsequent transfer
will convert the order instrument as bearer instrument. However, its subsequent transfer needs
indorsement because mere delivery is not sufficient, being originally an order instrument. It will
be restored to its original character as an order instrument. A transfer of order instrument thru
blank indorsement can be subsequently negotiated by mere delivery but transfer subsequent to
the latter made thru delivery shall be made thru indorsement because the rule on “once a
bearer instrument will always be a bearer instrument.
2. If indorsement is special, indorsemet is required.

Negotiation and assignment, distinguished.

When instrument allows negotiation, it will give the holder to be a holder in due course. Negotiation
applies only when instrument is negotiable. No such thing as negotiation of a non-negotiable
instrument.

A non-negotiable instrument cannot be negotiated but can be assigned

A negotiable instrument can be negotiated and assign as well.

Difference between negotiation and assignment- due course holding. What’s with holder in due course
not with assignee. Holder in due course will acquire better rights over the original holder, unlike in
assignment, acquires only the entitlements of the assignor.

Benefits of having gone thru negotiation is realized only to defenses available to the one who will pay.

Holder in due course- requisites (memorize)

Liability and defenses (sec 60-66)- memorize

Holder in due course (sec. 52)

One who has acquired the instrument under the following conditions:
1. Complete and regular upon its face- it is possible that the instrument may appear to be
complete but irregular (ex. Tampered provisions, alterations).
2. Became holder of it before it was overdue. The fact that it was previously dishonoured, he
must not be aware of it.
3. Taken in good faith and for value
4. At the time it was negotiated to him, he had no notice of any infirmity in the instrument or
defect in the title of the person negotiating it. Even if the instrument has a defect, or invalid,
one can still be a holder in due course as long as he is not aware thereof, provided that the
defect is non-apparent. If apparent, 1st item will apply. An instrument that has no
consideration, as long as the holder is not aware, he can still be holder in due course.
Invalidity caused by non-consideration, illegality,lack of it are only personal defense, not
available as against a holder in due course.
No notice as to the defect in the title of the person negotiating it, can still be a holder in due
course.

Due course holding- is a presumption

The burden to prove non-holding in due course is the challenger who alleges the holder is not one in due
course.

What does a holder in due course has which is not available to other holders? He is like an innocent
purchaser in good faith and for value who enjoys greater protection than non-innocent buyers.

Shelter Rule- in the hands of any holder other than a HIDC, a negotiable instrument is subject to
defenses as if it was non-negotiable. A holder who derived thru a HIDC, not a party to the illegality of the
instrument, acquire the rights of a HIDC with respect to prior parties to the holder in due course (due to
shelter rule). This refers to a holder who acquired the instrument not as holder in due course because
any one of the above enumerated circumstances not present, but has nothing to do with the illegality of
the instrument committed by prior parties. This party who is not a holder in due course who acquired
title from an HIDC cannot interpose the shelter right to the holder subsequent to him.

PN- parties potentially liable:

 1. Maker
2. Indorsers
a. General
b. Qualified
3. Persons who negotiated the instrument by mere delivery

BoEX, persons potentially liable

1. Drawer( sec. 61)

2. Acceptor (62
3. Indorsers
a. General (66)
b. Qualified (65)
4. Persons who negotiated the instrument by delivery (65)

Note: Except the one who negotiated the instrument by delivery, all other parties signed the instrument.

Maker of the instrument admits the existence of the payee and has the capacity to indorse.

Drawer admits the existence of drawee … check with sec. 61

On the part of the acceptor, by accepting the instrument, engages that he will pay the instrument …

1. Existence of drawer
2. Capacity to indorse

Who are liable to the instrument, even without signing:

1. Those who negotiate by delivery

2. Forger
3. Agent

Negotiation by delivery but indorsement is qualified, san recourse (no recourse against him if unpaid)-
he only guarantee certain warranties.

Qualified indorser- does not guarantee payment unlike that of a general indorser.

Instrument is genuine and has good title

All parties has capacity to contract

No knowledge of any fact that will render the instrument defective

Among the parties who are potentially liable, one who negotiate thru delivery is the least liable because
he is not liable for any breach in indorsement.

2 structures of liabilities:
 1. Payment- not common, there are parties who don’t assume payment
a. Primarily liable
b. Secondarily liable
2. Warranty- common to all because all parties warrant to secure the holder (certain admission of
facts, if found to be untrue will make the person liable for breach thereof)

Those falling under section 65 guarantees warranties, not payment.

In a promissory, it is possible that only the maker be made liable, if indorser opted not to negotiate it
further, likewise if person does not deliver it.

A maker who dishonoured the instrument (where only 1 holder and maker are involved), only resort of
the holder is against the maker who is primarily liable.

In bill of exchange, possible that only one holder as against drawer. Holder cannot sue and demand
payment from the drawee if latter refuse, being not a privy thereto. If not accepted by drawee, drawer
is liable to the holder.

Payment is not common to all the parties listed therein. In PN, maker is the one who is liable to pay
according to its tenor (maker’s liability is primary)- he pays by just making it, no condition to make him
liable to pay, one who assumes secondarily liability is general indorser. (sec 66- in addition, general
indorser assumes payment provided that holder should present it to someone primarily liable. If
dishonoured, notice of dishonour must be given to GI to make him liable.)

Bill of exchange, drawer and general indorser secondarily liable for payment on due presentment. Their
commitment to pay is conditional: presentment and notice of dishonour is given. Otherwise, they will be
discharged from liability. Drawee who accepts is also primarily liable. if drawee previously accepted but
subsequently found that the drawer’s signature is forged, cannot deny liability because he warrants the
genuiness of signature of the drawer.

Warranties- when answerable? When one assume certain things to be true though it may appear to be
untrue. Is this common liability among all the parties? Yes.

As to warranties, both maker and drawer are situated the same admits the existence of payee and his
capacity to indorse. They differ in terms of payment, maker primarily liable, while drawer only
secondarily liable.

Warranties of an acceptor:

1. Warrants the existence of drawer, genuiness of signature, and his capacity to indorse.

Indorsers-

1. Qualified
2. Those negotiating by delivery- guaranties warranty only but not payment
In case of qualified indorser, the drawer’s/maker’s signature is forged, still liable because his
indorsement assumed genuineness of the signature of the parties. His indorsement includes liability in
case of forgery.

Defenses:

1.Real- can be invoked even against HIDC

2. Personal- weaker defenses- cannot be invoked against HIDC

Personal defenses (made by virtue of the law itself, statutory)

a. Antedating/postdating of check- filling up of blanks beyond the authority conferred
b. Absence or failure of consideration – illegality/immorality of consideration

Real defenses

a. Minority
b. Want of authority – ultra vires acts
c. Absent of delivery of instrument which is incomplete
d. Fraud in factum
e. Forgery
f. Material alteration- partial real defense
g. Extinctive prescription

These defenses may excuse the person to pay the holder.

Personal defense- has no use if it is invoked against a holder in due course.

Indorsers who has nothing to do with the personal defense, are liable to the holder due to their
warranties. Whether they are general or qualified indorser, they warrant the instrument to be genuine
and in all respects it purports to be. This is a common warranty between the indorsers.

In case of bearer instrument, applying the same circumstances above, those people who negotiate by
delivery warrants the genuineness and in all respects what it purports to be. The holder has a limited
recourse, that is to go against the immediate transferor (as distinguished from order instrument)
because due to no indorsement, no way to trace who are the prior transferors.

Want of delivery (under the law) and its consequence- governed by sec 16- not one of simple want of
delivery but delivery of a complete instrument (personal defense) while want of delivery of incomplete
instrument (real defense –sec 15)

Want of consideration/failure of consideration/partial consideration- all personal defenses.

Last paragraph of sec 65- qualified indorser is not liable if he is not aware, in good faith about the want
of consideration, he will be excused from liaibility. Not applicable to general indorser.
Forgery

1. Forgery of PN
a. Real defense, provided there is no contributory negligence on the person of the person
whose signature was forged or negligence (does not matter whether the note is payable to
order or maker). Does the note becomes inoperative? No. The instrument is not wholly
inoperative. As against the party whose signature whose forged, not liable. But indorsers
subsequent to forgery are liable. they cannot interpose the defense of forgery because of
their warranty as to the genuineness of the instrument indorsed in all purpose it purports to
be. There is a breach of this warranty. It does not matter whether the indorser is general or
qualified, because this warranty is common to all.
2. Forgery of BoEx

Want of delivery- when stolen

Parties prior to the indorser whose signature was forged, by application of Cut-off rule, can interpose
the defense of forgery to the signature of the indorser. Hence, cannot be held liable to pay the holder
(regardless HIDC or not). While there is a valid note made by the maker, but tenor of his promise is “to
pay the subsequent indorser or order of said indorser”. Hence, if the said indorser’s signature was
forged, no such order as contained in the tenor of the commitment of the maker. Hence, not liable. this
applies only in an instrument payable to order, where indorsement is an essential element of
negotiation.

Same facts above, in case it’s a bearer instrument, cut off rule does not apply. The party prior to forgery
cannot set up this defense because in a bearer instrument, the indorsemetn is not necessary to
negotiate it but by mere delivery. However, if stolen, hence want of delivery, prior party can set up
defense of want/absent of delivery but this is just a personal defense which can be interposed only to a
holder not in due course.

Bill of exchange-

If drawee refuse to accept, go against the drawer and indorsers.

If signature of drawer is forged, but previously accepted already by drawee, upon presentment for
payment by holder to drawee, latter cannot be allowed to raise forgery of the drawer because under sec
62, when drawee accepts, it carry with it admission of genuineness of drawer’s signature. Who else are
barred from raising forgery of the drawer- all indorsers subsequent to drawer because they warrant the
genuineness of the instrument and in all purpose it purports to be.

If payee’s signature is forged, will the drawer liable to pay? Not liable, apply same rationale in
Promissory note. However, if drawee previously accepted the bill of exchange and payee’s signature was
forged, drawee-acceptor can raise the defense of forgery because his warranties as to genuiness of
signature does not included that of the payee. The drawee-acceptor, as far as the payee is concerned,
his warranty is existence and capacity of the payee to indorse. Cut-off rule will apply.

Normally, the end of above controversies is a fight against drawer and drawee. Initially, drawee pays
first but without prejudice to recourse against the party liable for forgery. As between drawer and
drawee, the one who usually made to bear the loss by the court, is the drawee, unless the court also
finds the drawer liable due to fault or negligence. If drawer has fault or was negligent, part or whole
of the loss will be borne by the drawer. Normally, if drawee was made liable, he will go against the
holder who presented payment and recovery from prior parties until the one liable for forgery will be
traced.

Case: Account holder of the check signs the check as payment to suppliers but assistant instead of
delivering the check to the supplier, he went directly to the bank and forged the signature of the
supplier to make it appear that there was a valid indorsement by the supplier. The account holder
demanded the drawee bank to credit back those accounts which were paid to supplier whose
indorsements were forged. The court ruled that due to length of time and number of checks forged by
the assistant exhibits negligence, hence account holder was made liable, not the drawee bank solely.

Know instances when presentment for acceptance is required.

Drawee is not bound to pay the holder, not a privy to the contract between drawer and holder.

Material alteration- as against HIDC, parties prior to alteration are not excused from liability but liability
is limited only to the original tenor of the instrument. This is a partial real defense, only up to the
original tenor of his indorsement/commitment in the instrument made/delivered.

How to enforce liability? (steps)- in order for holder to enforce liability of indorser with regard to
payment (relevant only to those who are secondarily liable to pay, not applicable to liability of primarily
liability for payment or liability as to warranty).

1. Presentment
2. Dishonor proceedings

Notice of dishonour is necessary to be issued by holder to drawer and indorsers in case of non-
acceptance for payment when presented to the drawee.

Non-acceptance of drawee is an act of dishonour, hence, holder can already issue of dishonour to the
parties secondarily liable (drawer and indorsers).

Qualified/Partial acceptance by drawee (willing to accept but partial only- drawee not obliged to accept
but it’s an option to accept or not)- this can be taken as an act of dishonour because under 61 and 66,
on due presentment, the instrument must be accepted according to its original tenor. Partial acceptance
is not accepatane according to its tenor. Holder may now issue notice of dishonour.
Cases when notice of dishonour not issued because presentment was not made (presentment
excused):- secondary party liable, not discharged (sec. 82)
1. After exercise of reasonable diligence by the holder
2. Drawee appears to be a fictitious person
3. Waiver of presentment, expressly or impliedly

Notice of dishonour excused (sec 109)

1. Notice of dishonour waived, expressly or impliedly.
2. Notice not given to drawer (sec 114)’if drawer himself is the one who did not accept
when presented to him by the holde.
3. Drawee is fictitious , no capacity to contract and indorser is much aware of this fact
4. Drawer has no right to expect drawee to accept (example: drawer requested drawee
to close his account)