HANDOUT 7: NEGOTIABLE INSTRUMENTS Integrative Course for Regulatory Framework for Business Transactions (RFBT) Instructor: K.

J-Culajara

ATENEO DE ZAMBOANGA UNIVERSITY debt is not a valid tender of payment and may be refused negotiable instruments and accordingly assumed the
School of Management and Accountancy receipt by the obligee or creditor. warranty of the endorser when it stamped its guarantee of
Accountancy Department prior endorsements at the back of the checks. (BDO v.
REQUISITES OF NEGOTIABLE INSTRUMENTS Equitable Banking Corp., G.R. No. 74917, January 20,
NEGOTIABLE INSTRUMENT (WUPOA) 1988)
It is a written contract for the payment of money 1. It must be in Writing and signed by the maker or
and passes from one person to another as money, in such drawer. POINT OF NEGOTIABLE NON-
manner as to give a holder in due course the right to hold 2. It must contain an Unconditional promise or order COMPARISON INSTRUMENT NEGOTIABLE
the instrument free from defences available to prior parties. to pay a sum certain in money. INSTRUMENT
3. It must be Payable on demand or at a fixed or Applicable law Governed by the Law on Contracts
PRINCIPAL CHARACTERISTICS OF NEGOTIABLE determinable future time. NIL
INSTRUMENTS 4. It must be payable to Order or to bearer. Transferability Transferable by Transferable only
• Negotiability – An instrument is passed from one 5. Where the instrument is Addressed to a drawee, negotiation or by by assignment
hand to another similar to money, so as to give the he must be named or otherwise indicated therein assignment
holder in due course the right to hold the with reasonable certainty. Transferee Transferee can be The transferee
instrument free from any defect of prior parties Note: a negotiable promissory note needs to a holder in due remains to be an
and free defenses available to prior parties among have requisites 1 to 4; a negotiable bill of exchange course if all the assignee and can
themselves, and enforce payment of the instrument needs to have requisites 1 to 5. requirements never be a holder
for the full amount thereof against all parties liable under Sec. 52 are in due course.
thereon. NON-NEGOTIABLE INSTRUMENTS complied with.
• Accumulation of secondary contracts – These are instruments which do not meet the Defenses A holder in due All defenses
Secondary contracts are entered into thereby requirements laid down to qualify an instrument as a course takes the available to prior
increasing the chances of the holder to collect the negotiable one. negotiable parties may be
amount payable on the instrument. It is merely a simple contract in writing and is instrument free raised against the
evidence of such intangible rights as may have been created from personal last transferee.
FUNCTIONS OF A NEGOTIABLE INSTRUMENT by the assent of the parties. defenses and
• It serves as a substitute for money. defects in title.
• It increases the purchasing medium in circulation. Effect of estoppel Nature of title Requires clean Transferee
The doctrine of estoppel may convert a non- title, one that is acquires a
• It is intended like money to have a definite value to
negotiable instrument into a negotiable one. free from any derivative title
be taken at sight without the need of investigating
The collecting bank, having stamped its guarantee infirmities in the only.
into the outside facts.
of “all prior endorsements and/or lack of endorsements” is instrument and
• When genuine, it ought to serve as the equivalent now estopped from claiming that the checks under
of money defects of title of
consideration are not negotiable instruments. By such prior transferors.
deliberate and positive attitude of the petitioner, it has for Solvency of the Solvency of Solvency of
A check, whether a manager’s check or ordinary check, all legal intents and purposes treated the said checks as
is not legal tender, and an offer of a check in payment of a debtor debtor is in a debtor is not
1
HANDOUT 7: NEGOTIABLE INSTRUMENTS Integrative Course for Regulatory Framework for Business Transactions (RFBT) Instructor: K. J-Culajara

sense guaranteed guaranteed under  Negotiable document of title, bill of lading, and steps into the shoes of the assignor and acquires the
by the indorsers Art. 1628 of the warehouse receipt – it is not negotiable because it instrument subject to all defences that may be set
because they Civil Code unless represents goods, not money. up against the transferor.
engage that the expressly  Certificate of stocks – it is not negotiable because
instrument will stipulated. there is no order or promise to pay. It is a written NEGOTIATION AND ASSIGNMENT,
be accepted, paid evidence of shareholdings of a person in a DISTINGUISHED
or both and that corporation, hence, it does not represent an • Negotiation applies only to negotiable instruments.
they will pay if obligation to pay a sum certain in money. Assignment applies to contracts including
the instrument is negotiable instruments.
 Cash disbursement voucher – it is not a negotiable
dishonored. • In negotiation, the transferee becomes a holder. In
instrument because it is nothing more than a
receipt evidencing payment by borrowers of the assignment, the transferee becomes a mere
EXAMPLES OF NON-NEGOTIABLE INSTRUMENTS loans previously extended to them. assignee.
 Treasury warrant – it is payable out of a particular  Negotiable order of withdrawal – it is not • A person to whom an instrument is negotiated and
fund of the national treasury. negotiable because it is payable to a specified becomes a holder in due course is subject only to
 Postal money orders person. real defenses. A person who takes an instrument by
o The rules provide for not more than one assignment is subject to both real and personal
 Withdrawal slip – it is not negotiable because the
indorsement and that payment may be defenses.
essence of negotiability which characterizes a
withheld under a variety of negotiable paper as a credit instrument lies in its • In negotiation, a general indorser warrants the
circumstances; and freedom to circulate freely as a substitute for solvency of prior parties. In assignment, an
o In establishing and operating a postal money is lacking. assignor does not warrant the solvency of prior
money order system, the government is parties unless there is a stipulation to the contrary
 Pawn ticket – it does not represent money, but
not engaging in commercial transactions or he knows of such insolvency.
pawned articles.
but merely exercises a governmental • In negotiation, presentment and notice of dishonor
power for public benefit. is required to make an indorser liable. In
TRANSFER
 Letters of credit – it does not contain an assignment, the assignor is liable even without
unconditional promise or order to pay because notice of dishonor.
If an instrument is negotiable, it may be transferred
payment or advancement made by the entity • Negotiation is governed by the Negotiable
through negotiation, assignment, or by operation of law.
(bank) requested to pay should be made only if the Instruments Law. Assignment is governed by the
third person (seller) presents certain documents. In  Negotiation – it is the transfer of the instrument Civil Code on assignment of credits.
addition, it is payable to a specified person and not from person to another so as to constitute the
to order. transferee the holder thereof. If payable to bearer, KINDS OF INDORSEMENT
it is negotiated by delivery; if payable to order, it is
 Trust receipt – it is not negotiable because it is an • Special indorsement – it specifies the person to
negotiated by the indorsement of the holder and
evidence of ownership of goods, not money. whom or to whose order the instrument is to be
completed by delivery.
payable. Note: The indorsement is necessary for
 Assignment – it is a method of transferring a non-
negotiable instrument whereby the assignee merely
2
HANDOUT 7: NEGOTIABLE INSTRUMENTS
the further negotiation of the order
instrument.
• Blank indorsement – it specifies no indorsee. If the
instrument is an order instrument, the instrument
becomes a bearer instrument and may be
negotiated by mere delivery.
• Qualified indorsement – it constitutes the indorser
a mere assignor of the title to the instrument. It
does not impair the negotiable character of the
instrument. Note: The words “without recourse”
or words of similar import simply mean that
the qualified indorser is not liable if the holder
cannot collect because of the insolvency of prior
parties or that the instrument is invalid or that
no valuable consideration was given. However,
he is liable on his warranties.
• Conditional indorsement – this is an indorsement
that is subject to the happening of a condition.
Note: The party required to pay the instrument
may disregard the condition and make payment
to the indorsee or his transferee whether the
condition has been fulfilled or not.
• Restrictive indorsement – an indorsement that
prohibits the further negotiation of the instrument
(i.e. “Pay to X only.”), constitutes the indorsee the
agent of the indorser, or vests title in the indorsee
in trust for or to the use of some other person.
Effects of restrictive indorsement – A restrictive
indorsement confers upon the indorsee the right
• To receive payment of the instrument;
• To bring any action thereon that the indorser could
bring;
• To transfer his rights as such indorsee, where the
form of the indorsement authorizes him to do so.
Integrative Course for Regulatory Framework for Business Transactions (RFBT)
INDORSEMENT OF INSTRUMENT ORIGINALLY
PAYABLE TO BEARER
• If indorsed specially it may nevertheless be further
negotiated by mere delivery.
• A person indorsing specially is liable as indorser to
only such holders as make title through his
indorsement.
INDORSEMENT OF INSTRUMENT IS PAYABLE TO
TWO OR MORE PERSONS
• If payees or indorsees are jointly bound – All
payees or indorsees must indorse the instrument,
except: (1) if the joint payees or indorsees are
partners; or (2) if one of them is authorized to
indorse for the others
• If payees or indorsees are bound solidarily –
Any one may indorse the instrument.
STRIKING OUT INDORSEMENTS
• Order instruments – If there are only blank
indorsements, the holder may strike out any
indorsement immediately following a blank
indorsement. If there are only special
indorsements, the holder may not strike out any
indorsement since he must race his title through all
the indorsements, except when the instrument was
negotiated to a prior party then such prior party
may strike out his indorsement and those of the
intervening parties.
• Bearer instruments – The holder may strike out
any indorsement, whether the same is a blank or a
special indorsement, since an indorsement is not
necessary to his title.
EFFECT OF STRIKING OUT INDORSEMENTS
3
Instructor: K. J-Culajara
• The indorser whose indorsement is struck out is
relieved from his liability on the instrument.
• All subsequent indorsers are likewise relieved from
their liability on the instrument.
HOLDERS
THE HOLDERS
• Holder for value – A holder who has given value
for an instrument issued or negotiated to him.
• Holder in due course – A holder who has taken
the instrument under the following conditions (C-
O-G-I):
• That it is Complete and regular upon its
face;
• That it became the holder of it before it
was Overdue and without notice that it
had been previously dishonored, if such
was the fact;
• That he took it in Good faith and for
value;
• That at the time it was negotiated to him
he had no notice of Infirmity in the
instrument or defect in the title of the
person negotiating it.
• Holder not in due course – When any one of the
conditions to be a holder in due course.
LIABILITIES OF PARTIES ACCORDING TO
NATURE
The following are the sources of liabilities of parties
 Warranties
 Engagement to pay
HANDOUT 7: NEGOTIABLE INSTRUMENTS Integrative Course for Regulatory Framework for Business Transactions (RFBT) Instructor: K. J-Culajara

WARRANTIES D. Indorsers Makes the parties liable to pay the sum certain in
These are affirmations of fact on the part of the o Persons negotiating an instrument by money stated in the instrument conditioned upon
parties that impose no direct obligation to pay in the absence delivery or a qualified indorser or a presentment and notice of dishonour.
of breach thereof. person indorsing a bearer instrument (G- Such action cannot be brought until maturity of the
There is breach of warranty when the facts which T-C-I) instrument.
the parties represent to be true are actually false.  That the instrument is Genuine
If there is breach of warranty, the party who and in all respects what it Parties primarily liable
committed the breach may be held liable, or be barred from purports to be;  In case of promissory note – the maker. Note: The
asserting a particular defense.  That he has good Title to it; maker pays according to the tenor of the
 That all prior parties had instrument.
WARRANTY LIABILITIES OF PARTIES Capacity to contract; and  In bills of exchange – the acceptor (i.e. the drawee
A. Maker (P-E-C)  That he has no knowledge of any upon acceptance of the bill, or upon certifying the
o Engages to Pay according to the tenor of fact which could Impair the check). Note: Acceptor engages to pay according
the instrument; validity of the instrument or to the tenor of his acceptance, which may not be
o Admits the Existence of the payee; and render it valueless. the same as the tenor of the bill itself because the
o Warrants the payee’s Capacity to indorse. acceptance may be qualified.
B. Drawer (P-D-A-C) To whom warranty extends
o Engages that on due Presentment, the  Qualified indorsement – to all Parties secondarily liable
instrument will be paid, accepted, or parties who derive their title  Drawer – he engages to pay after the following
both, according to its tenor by the party through his indorsement; conditions are met:
primarily liable; and  Persons negotiating by delivery – o The bill is presented for acceptance or for
o Engages that if the instrument is to immediate transferees only. payment as the case may be to the
Dishonored and necessary proceedings are
drawee;
brought, he will pay to the party entitled o General indorser (G-T-C-V) o The bill is dishonoured by non-acceptance
to be paid;
 That the instrument is Genuine or non-payment, as the case may be; and
o Admits the existence of the payee; and and in all respects what it o The necessary proceedings of dishonour
o The payee’s Capacity to indorse. purports to be; are duly taken;
C. Acceptor (P-A-G-C-E-C)
 That he has good Title to it;  Notice of dishonour is given to
o Engages to Pay according to the tenor of
 That all prior parties had the drawer; or
his acceptance;
o Admits existence of the drawer;
Capacity to contract; and  In case of foreign bills, protest is
 That the instrument is, at the made.
o Genuineness of the drawer’s signature;
o Drawer’s Capacity and authority to draw time of his indorsement, Valid  General indorser/unqualified indorser
the instrument; and subsisting.  Irregular indorser
o Existence of the payee; and
o Payee’s Capacity to indorse. ENGAGEMENT TO PAY PROMISSORY NOTE
4
HANDOUT 7: NEGOTIABLE INSTRUMENTS
PROMISSORY NOTE
It is an unconditional promise in writing made 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 to bearer.
PARTIES IN A NEGOTIABLE PROMISSORY NOTE
• Maker – The person who executes the written
promise to pay.
• Payee – The person in whose favor the promissory
note is made payable.
Note: Requisites for negotiable promissory note
is W-U-P-O. See previous slides for the complete
requisites.
INCIDENTS IN THE LIFE OF A NEGOTIABLE
PROMISSORY NOTE (IN-PD-ND)
• Issue – it is the first delivery of the instrument,
complete in form, to a person who takes it as
bidder.
• Negotiation – it is the transfer of a negotiable
instrument from one person to another in such a
manner as to constitute the transferee the holder
thereof.
• Bearer instrument – negotiated by mere
delivery
• Order instrument – negotiated by
indorsement completed by delivery.
• Presentment for payment – it is the production
of a promissory note to the party primarily liable
for the payment of the same, or of a bill of
exchange to the drawee or acceptor for payment.
• Dishonor by non-payment – it is dishonored
when:
Integrative Course for Regulatory Framework for Business Transactions (RFBT)
• It is duly presented for payment and
payment is refused or cannot be obtained;
or
• Presentment for payment is excused and
the instrument is overdue and unpaid.
• Notice of dishonor – it is notifying the drawer and
the indorsers that the instrument has not been
accepted by the drawee, or that is has not been
paid by the acceptor, in case of bills of exchange,
or by the maker, in case of promissory notes.
• Discharge – it is discharge through any of the
following means:
• Payment in due course by or on behalf of
the principal debtor;
• Payment in due course by the party
accommodated where the instrument was
made or accepted for his accommodation;
• By intentional cancellation of the
instrument by the holder;
• By another act which discharges a simple
contract for the payment of money;
• When the principal debtor becomes the
holder of the instrument at or after
maturity in his own right.
BILL OF EXCHANGE
BILL OF EXCHANGE
A 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 to bearer.
PARTIES IN A NEGOTIABLE BILL OF EXCHANGE
5
Instructor: K. J-Culajara
• Drawer – The person who executes the written
order to pay.
• Payee – The person in whose favor the bill of
exchange is made payable.
• Drawee – The person who is given the command
by the drawer to pay the payee.
Note: Requisites for negotiable bill of exchange
is W-U-P-O-A. See previous slides for the complete
requisites.
INCIDENTS IN THE LIFE OF A NEGOTIABLE BILL
OF EXCHANGE (IN-PAD-PD-NPD)
• Issue – it is the first delivery of the instrument,
complete in form, to a person who takes it as
bidder.
• Negotiation – it is the transfer of a negotiable
instrument from one person to another in such a
manner as to constitute the transferee the holder
thereof.
• Bearer instrument – negotiated by mere
delivery
• Order instrument – negotiated by
indorsement completed by delivery.
• Presentment for acceptance – it is the act of
exhibiting the bill of exchange to drawee for his
acceptance. It is required only:
• If the bill is payable at a fixed period after
sight, or in cases where it is necessary to
fix the maturity of the instrument; or
• When the bill expressly stipulates that it
shall be presented for acceptance; or
• When the bill of exchange is drawn
payable elsewhere than at the residence or
place of business of the drawee.
HANDOUT 7: NEGOTIABLE INSTRUMENTS
• Acceptance – it is the signification by the drawee
of his assent to the order of the drawer. The
acceptance must be in writing and signed by the
drawee.
• Dishonor by non-acceptance – a bill of exchange
is dishonored by non-acceptance.
• When it is duly presented for acceptance
and such acceptance is refused or cannot
be obtained; or
• When presentment for acceptance is
excused and the bill is not accepted.
• Presentment for payment – it is the production
of a promissory note to the party primarily liable
for the payment of the same, or of a bill of
exchange to the drawee or acceptor for payment.
• Dishonor by non-payment – it is dishonored
when:
• It is duly presented for payment and
payment is refused or cannot be obtained;
or
• Presentment for payment is excused and
the instrument is overdue and unpaid.
• Notice of dishonor – it is notifying the drawer and
the indorsers that the instrument has not been
accepted by the drawee, or that is has not been
paid by the acceptor, in case of bills of exchange,
or by the maker, in case of promissory notes.
• Protest – it is a formal written statement signed by
a notary stating that he presented a foreign bill of
exchange for acceptance or for payment and that it
was refused.
• Discharge – it is discharge through any of the
following means:
• Payment in due course by or on behalf of
the principal debtor;
Integrative Course for Regulatory Framework for Business Transactions (RFBT)
• Payment in due course by the party
accommodated where the instrument was
made or accepted for his accommodation;
• By intentional cancellation of the
instrument by the holder;
• By another act which discharges a simple
contract for the payment of money;
• When the principal debtor becomes the
holder of the instrument at or after
maturity in his own right.
OTHER MATTERS CONCERNING NEGOTIABLE
INSTRUMENTS IN GENERAL
INSTRUMENT MUST BE IN WRITING
• The writing may be in ink, print or pencil. It may
be made on paper, parchment, or any substitute of
paper that may be passed from one hand to
another.
• The signature is usually made by writing the name
of the signer.
UNCONDITIONAL PROMISE OR ORDER
• The promise or order should be absolute. If it is
subject to a condition, the instrument is not
negotiable and the happening of the condition does
not cure the defect. Note: The word “promise”
need not to be used. Other words of similar
import may suffice.
• Mere acknowledgement of a debt without a
promise is not enough.
• Mere authorization to pay, such as: “I authorize you
to pay B” will not render the instrument negotiable.
• The promise or order must be unconditional and
absolute. If it is based upon a condition, it is non-
6
Instructor: K. J-Culajara
negotiable. The happening of the condition will not
cure the non-negotiability of the instrument.
• Sum payable must be certain in money and in
money only.
WHEN INSTRUMENT IS PAYABLE ON DEMAND
• When the instrument is expressed to be payable on
demand.
• When it is expressed to be payable at sight.
• When it is expressed to be payable upon
presentation.
• When no time for payment is expressed.
WHEN INSTRUMENT IS PAYABLE ON A FIXED OR
DETERMINABLE FUTURE TIME
• When it is expressed to be payable at a fixed
period after date.
• When it is expressed to be payable at a fixed
period after sight.
• When it is expressed to be payable on or before a
fixed or determinable future time specified in the
instrument.
• When it is expressed to be payable on or at a fixed
period after the occurrence of a specified event
which is certain to happen.
WHEN INSTRUMENT IS PAYABLE TO ORDER
• An instrument is payable to order when it is drawn
payable to the order of a specified person or to him
or his order, such as “Pay to the order of Pablo
Patricio” or “Pay to Pablo Patricio or order”.
• Where the instrument is payable to order, the
payee must be named or otherwise indicated
therein with reasonable certainty. Otherwise, it is
HANDOUT 7: NEGOTIABLE INSTRUMENTS
useless to consider the instrument negotiable
because no one could indorse the instrument.
WHEN INSTRUMENT IS PAYABLE TO BEARER
• When it is expressed to be payable to bearer, such
as “Pay to bearer the sum of P5,000.”
• When it is expressed to be payable to a person
named therein or bearer, such as “I promise to pay
P or bearer the sum of P5,000.”
• When it is payable to the order of a fictitious or
non-existing person, and such fact is known to the
person making it so payable.
• When the name of the payee does not purport to
be the name of any person, such as “Pay to the
order of CASH P10,000.”
• When the only or last indorsement is an
indorsement in blank.
• An instrument payable “to the order of bearer…”
is an order instrument which needs the
indorsement of the payee (the bearer) for its
negotiation.
• An instrument payable “to bearer P” or “to P,
bearer” is not an instrument payable to bearer
because the word “bearer” is merely descriptive of
P. Accordingly, the instrument is not negotiable
because it is payable to a specified person.
• The drawee must be named or otherwise indicated
in the instrument with reasonable certainty.
PROVISIONS, STIPULATIONS, OMMISSIONS,
AND OTHER MATTERS NOT AFFECTING
NEGOTIABILITY
• When the sum payable is to be paid with interest.
Note: The legal interest rate is 6% per annum,
contrary to the rate stated in the Soriano book.
Integrative Course for Regulatory Framework for Business Transactions (RFBT)
• When the sum payable is to be paid by
installments. Note: To be negotiable, the
installments must be stated, and that the
maturity of each installment must be fixed or
determinable.
• With an acceleration clause; that is, a provision
that states that default of an installment payment
would render the whole amount due.
• When the sum to be paid is with exchange,
whether at a fixed rate or at a current rate.
• When the sum payable is to be paid with costs of
collection or an attorney’s fee, in case the
instrument is not paid at maturity.
• The instrument indicates a particular fund out of
which reimbursement is to be made or a particular
account to be debited with the amount. Note: If
the payment is made directly out of a
particular fund, the instrument becomes non-
negotiable.
• The instrument contains a statement of the
transaction which gives rise to the instrument.
• The instrument authorizes the sale of collateral
securities in case the instrument is not paid at
maturity.
• The instrument authorizes the confession of
judgment if the instrument is not paid at maturity.
• The instrument waives the benefit of any law
intended for the protection or advantage of the
obligor.
• The instrument gives the holder an election to
require something to be done in lieu of the
payment of money.
Note: If the phrase “at the option of the
holder” or words of similar import are not included,
the instrument is not negotiable for the reason that
7
Instructor: K. J-Culajara
the option will belong to the maker or other debtor
such as the drawee.
• The instrument is not dated. Note: See the
succeeding slides for the rules on dating of an
instrument.
• The instrument does not specify the value given, or
that any value has been given therefor.
• The instrument does not specify the place where it
is drawn or the place where it is to be payable.
• The instrument bears a seal.
• The instrument designates a particular kind of
current money in which payment is to be made.
DATING OF AN INSTRUMENT
When date necessary but not for negotiability
• To fix the date of maturity of the instrument.
Note: The insertion of a wrong date will not
avoid the instrument in the hands of a
subsequent holder in due course; but as to him
the date so inserted is the true date.
Note: The insertion of a wrong date is a personal
defense that cannot be interposed against a holder in
due course.
• To determine when interest is to run.
• To fix the period of prescription.
Ante-dating and post-dating of instrument
• The instrument is not rendered invalid provided it
is not done for an illegal or fraudulent purpose.
• The person to whom an instrument so dated is
delivered acquires title thereto as of the date of
delivery.
HANDOUT 7: NEGOTIABLE INSTRUMENTS
CONSTRUCTION WHERE INSTRUMENT IS
AMBIGUOUS
• Where the sum payable is expressed in words and
also in figures and there is discrepancy between the
two, the sum denoted by words is the sum payable;
but if the words are ambiguous or certain,
reference may be had to the figures to fix the
amount.
• Were the instrument provides for the payment of
interest, without specifying the date from which
the interest is to run, the interest runs from the
date of the instrument, and if the instrument is
undated, from the issue thereof.
• Where the instrument is not dated, it will be dated
as of the time it was issued.
• Where there is a conflict between the written and
printed provisions of the instrument, the written
provisions prevail
• Where the instrument is so ambiguous that there is
doubt on whether it is a bill or a note, the holder
may treat it as either at his option.
• Where a signature is so placed upon the instrument
that it is not clear in what capacity the person
making the same intended to sign, he is deemed to
be an indorser.
• Where the instrument containing the words “I
promise to pay” is signed by two or more persons,
they are deemed to be jointly and severally liable
thereon.
INCOMPLETE BUT DELIVERED INSTRUMENT
Integrative Course for Regulatory Framework for Business Transactions (RFBT)
MECHANICALLY INCOMPLETE BUT DELIVERED
INSTRUMENT
This refers to an instrument which is wanting in a
material particular such as the amount of the instrument,
and it is delivered to another for him to fill the blank or
blanks and negotiate it either for his own benefit or that of
the person making the instrument.
Note: There is both prima facie authority to fill
up the blanks, and to fill up the instrument for any
amount, when such incomplete instrument is delivered
to a person.
Wrongful or fraudulent insertion of details
when there is no intention to convert the paper into a
negotiable instrument is a real defense, and may be
interposed even against a holder in due course.
Other matters
• The blank must be filled up strictly in accordance
with the authority given.
• The same must be filled up within a reasonable
time.
Rights and obligations of holders in due course in case
of wrongful completion – He can enforce the instrument as
if it had been filled up strictly in accordance with the
authority given and within a reasonable time against:
• The parties prior to the wrongful completion;
• The party guilty thereof; and
• The parties subsequent to the wrongful
completion.
Rights and obligations of holders not in due course in
case of wrongful completion – He can enforce the
instrument as if it had been filled up strictly in accordance
with the authority given and within a reasonable time
against:
8
Instructor: K. J-Culajara
• The party guilty of the wrongful completion; and
• The parties subsequent to the wrongful
completion.
INCOMPLETE BUT UNDELIVERED INSTRUMENT
This refers to an instrument which is wanting in a
material particular such as the amount of the instrument or
the name of the payee, and it is undelivered.
Note: If the instrument is delivered without
authority, the instrument shall not be valid in the
hands of any holder as against any person whose
signature was placed thereon before delivery. Want of
delivery is a real defense. Hence, even if the holder is a
holder in due course, the latter cannot enforce the
instrument against him.
Note further: The instrument can be enforced
against the guilty party as well as those subsequent to
him.
This refers to an instrument which is complete in
form but not delivered. An instrument although complete in
form is an incomplete and revocable contract until the same
is delivered for the purpose of giving effect thereto.
Presumptions of valid delivery
• In the hands of a holder in due course. Note: This
is conclusively presumed.
• As between immediate parties and as regards a
remote party other than a holder in due course.
Note: This is a rebuttable presumption.
Note further: An immediate party is one who,
in relation to another party, may be physically remote
but is considered an immediate party by reason of the
knowledge of the conditions or limitations placed upon
HANDOUT 7: NEGOTIABLE INSTRUMENTS
the delivery of the instrument, or the fact that the
instrument was never delivered.
Possible defenses of a maker, drawer, acceptor, or
indorser
• That he made no delivery of the instrument;
• That if there was delivery, he did not authorize the
same;
• That if he authorized the delivery, the same was
conditional or for a special purpose only and not
for the purpose of transferring the property in the
instrument.
Personal defenses that cannot be invoked against a
holder in due course but may successfully be interposed
as against an immediate party or other holders not in
due course
• Want of delivery of complete instrument
• Conditional delivery
• Delivery for a special purpose
LIABILITY OF PERSONS WHOSE SIGNATURE
DOES NOT APPEAR ON THE INSTRUMENT
General rule: A person whose signature does not appear on
an instrument is not liable thereon, except:
• Where a person signs under a trade or assumed
name.
• Where an authorized agent signs for and on behalf
of his principal, the principal is liable although his
signature does not appear on the instrument. Note:
The agent, to not be liable, must be duly
authorized, adds words to his signature
describing himself as an agent, discloses his
Integrative Course for Regulatory Framework for Business Transactions (RFBT)
principal, and must act within the scope of his
authority.
• Where a person forges the signature of another,
the forger is liable.
• Where the acceptor accepts the instrument on a
paper other than the bill itself. The separate paper
is called an allonge.
• Where a person promises to accept in writing a bill
before it is drawn.
• Where a person negotiates a bearer instrument by
delivery.
• Where a drawee destroys a bill or refuses within
24 hours to return the bill accepted or not
accepted.
FORGERY
FORGERY
Forgery is the counterfeit making or fraudulent
alteration of any writing, and may consist in the signing of
another’s name, or the alteration of an instrument in the
name, amount, description of the person and the like, with
intent to defraud.
EFFECTS OF FORGERY
• The forged signature is wholly inoperative. Note:
Forgery is a real defense.
• No right to retain in the instrument, or to give a
discharge therefor or to enforce payment thereof
against any party thereto, can be acquired through
or under such signature, except:
• When a party against whom it is sought
to enforce such right is precluded from
setting up the forgery or want of
authority. Note: this includes those who
9
Instructor: K. J-Culajara
are estopped by their acts, silence,
inaction or negligence, or acceptors,
indorsers, and persons who negotiate
by delivery by reason of their warranty
that the instrument is genuine.
• Where the forged signature is not
necessary to the title of the holder.
OTHER MATTERS
• Forgery in indorsements cuts off parties prior to
the forgery. Note: An exception to this rule is
when a forged indorsement is not necessary for
the negotiation of the instrument, in which
case a holder in due course may collect even
from the party whose signature is forged
including those parties prior to him.
Example: Mr. Manly makes a note payable to bearer and
delivers it to Mr. Pepe. Mr. Pepe indorses the note to
Apple. The note is stolen from Apple by Fraudster who
negotiates the same to Boobsie by forging Apple’s signature.
Boobsie, thereafter indorses the note to Cocky, then Cocky
to Dick, then Dick to Hottie, the holder. Note: In this case
the instrument is a bearer note, hence indorsement is
not necessary for the negotiation of the instrument.
Note: Sec. 35 of the NIL specifies when an
instrument with blank indorsement can be subsequently
indorsed specially. It means that an order instrument
may become a bearer instrument by blank indorsement,
but may be subsequently converted into an order
instrument by indorsing it subsequently.
CONSIDERATION
Consideration is the cause of the contract; it is the
essential reason why a party enters into a contract
HANDOUT 7: NEGOTIABLE INSTRUMENTS
Presumptions
• Every negotiable instrument is deemed prima facie
to have been issued for a consideration.
• Every person whose signature appears on the
instrument is presumed to be a holder for value.
Note: A holder for value is one who has given
valuable consideration for an instrument
issued or negotiated.
Want, failure, or partial failure of consideration are
only personal defenses which are available against a holder
not in due course.
ACCOMMODATION PARTY
• An accommodation party is one who has signed the
instrument as maker, drawer, acceptor or
indorser, without receiving value therefor, and for
the purpose of lending his name to some other
person.
• He is 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.
Effects of payment of the instrument
• Payment by accommodated party – such payment
discharges the instrument. He has no recourse
against the accommodation.
• Payment by accommodation party – he has the
right against the accommodated party.
WHEN TITLE TO THE INSTRUMENT IS DEFECTIVE
• When he obtained the instrument or any signature
thereon through any of the following means: fraud,
Integrative Course for Regulatory Framework for Business Transactions (RFBT)
duress or force, other unlawful means, and for an
unlawful consideration.
• When he negotiates the instrument with breach of
faith or under such circumstances as to amount to
fraud.
KINDS OF DEFENSS OF PARTIES TO NEGOTIABLE
INSTRUMENTS
• Personal defenses – These defenses refer to the
acts or circumstances leading to the issuance of the
instrument rather than to the instrument itself.
They do not affect the validity of the instrument,
and can only be interposed against persons or
subsequent holders who stand in privity with them.
• Legal, real, or absolute defenses – These are
defenses that attach to the instrument itself and can
be used as reasons against payment of a negotiable
instrument to any holder, including a holder in due
course or a person who has the rights of a holder in
due course.
PERSONAL DEFENSES
• Insertion of a wrong date
• Want of authority to complete instrument;
• Want of delivery of complete instrument;
• Absence or failure of consideration;
• Acquisition of the instrument or a signature
thereon by fraud, duress, force and fear, or other
unlawful means, or for an illegal consideration;
• Negotiation of the instrument in breach of faith or
under such circumstances as amount to fraud;
• Fraud in inducement;
• Discharge by payment or renunciation or release
before maturity.
10
Instructor: K. J-Culajara
REAL DEFENSES
• Want of delivery of incomplete instrument;
• Forgery (including duress amounting to forgery);
• Minority or other form of incapacity;
• Fraud in factum, or in esse contractus;
• Discharge at or after maturity;
• Illegality of contract. Note: If it is the instrument
or contract itself that is expressly declared
illegal by statute, the illegality of the
instrument or contract is a real defense. But
where the instrument or contract is illegal
because of the manner of its execution or
because of unlawful consideration, such
illegality is a mere personal defense.
THE RIGHTS OF HOLDERS
• To sue on the instrument in his own name
• To receive payment of the instrument, and if the
payment is in due course, the instrument is
discharged.
THE RIGHTS OF HOLDERS IN DUE COURSE
• To sue on the instrument in his own name
• To receive payment of the instrument, and if the
payment is in due course, the instrument is
discharged.
• To hold the instrument but is subject to the same
defenses as if were non-negotiable.
• To have all the rights of a holder in due course if he
derives his title through such holder and he himself
is not a party to any fraud or illegality affecting the
instrument.
THE RIGHTS OF HOLDERS NOT IN DUE COURSE
HANDOUT 7: NEGOTIABLE INSTRUMENTS Integrative Course for Regulatory Framework for Business Transactions (RFBT) Instructor: K. J-Culajara

Generally, an instrument is subject to the same

defenses as were not negotiable. Except if (1) he derives his
title through a holder in due course; and (2) he himself is
not a party to any fraud or illegality affecting the
instrument.

11