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Notes on Negotiable Instruments 1

Atty. Abelardo Dumaguing

Important provisions
Sec. 1 Elements of Negotiable Instrument
Sec. 2 certainty of the amount payable
Sec. 3 in rel. to Sec. 47 unconditional character of instrument
Sec. 4 determinable future time, fixed future time, contingency
Sec. 5 provisions that do not affect the negotiability of the instrument
Sec. 6 omissions and additions
Sec. 7 payable on demand
Sec. 8 payable to order
Sec. 9 payable to bearer
Sec. 11 presumption of date (date is presumed correct)
Sec. 12 antedate and postdate
Sec. 13 insertion of date
Sec. 14 incomplete instrument but delivered
Sec. 15 incomplete and undelivered
Sec. 16 complete instrument but undelivered
Sec. 23 forgery
Sec. 124 material alteration
Sec. 125 material alteration
Sec. 24 presumption of valuable consideration
Sec. 28 want of consideration and failure of consideration
Sec. 29 accommodation party
Sec. 30 negotiation (referring to transfer of instrument)
Sec. 33-39 kinds of indorsement eg. Blank, special, restrictive (36), qualified, conditional
Sec. 48 striking out indorsement
Sec. 52 what constitutes a holder in due course
Sec. 59
Sec. 57 rights of a holder in due course
Sec. 60 liability of a maker
Sec. 61 liability of a drawer
Sec. 62 liability of an acceptor
Sec. 65 & 66 warranties of an indorser
Sec. 70-73 presentment for payment
Sec. 89 notice of dishonor
Sec. 126 definition of bill of exchange
Sec. 184 definition of a promissory note
Sec. 185 definition of a check

What is a negotiable instrument?

It is a written contractual obligation that requires payment of money with the following essential elements:

1. in writing and signed


a. by the maker (if a promissory note)
b. by the drawer (if a check)

2. contains unconditional
a. promise (for promissory note), or
b. order (for check or bill of exchange[BOE])

3. must be payable on
a. demand
b. fixed future time, or
c. determinable future time

4. payable to
a. order, or
b. bearer

5. Drawee (element required in check or bill of exchange)


drawee must be NAMED or be INDICATED with a REASONABLE CERTAINTY (if he cant be named)

WRITTEN AND SIGNED


Kinds of signature:
1. Conventional signature
2. Personalized signature

UNCONDITIONAL PROMISE/ORDER

Promise to pay shall be ABSOLUTE


Notes on Negotiable Instruments 2
Atty. Abelardo Dumaguing

Ex:
P10,000.00

I promise to pay to the to the order of Perdo ten


thousand pesos.

(Sgd)Amado
If it is ABSOLUTE then it is NEGOTIABLE and PAYABLE ON DEMAND

CONDITIONAL PROMISE
P20,000.00

I promise to pay to the to the to Mario or his order


after the unconditional surrender of the Al Qaeda
network to the Allied Forces

(Sgd)Amado
If it is CONDITIONAL then it is NON-NEGOTIABLE

Ex:
P30,000.00

I promise to pay thirty thousand pesos to Ruby or


bearer after she will celebrate Christmas of the year
2001.

(Sgd)Amado
This is not negotiable because it is with condition.

Ex:
P5,000.00

I promise to pay unconditionally to the order of Anton


five thousand pesos when it rains today.

(Sgd)Harry Potter
This is not negotiable because it with condition for it is dependent on the happening of an event that not sure to happen.

DEMAND (Sec. 7)
OVERDUE
NO TIME for payment is indicated
EXPRESSLY made payable on demand

EXPRESSLY
P40,000.00

On demand, pay to the order of Juana forty thousand


pesos.

To: Clara (Sgd) Bella

NO TIME
Baguio City
19 November 2001
P40,000.00
Pay to the order of Juana forty thousand pesos.

To: Clara (drawee) (Sgd)


Bella
No time for payment so it is payable on demand.

NB: A CHECK has NO TIME OF PAYMENT therefore it is payable on demand.


Sec. 185 A check is a bill of exchange drawn on a bank payable on demand

Instrument is OVERDUE

Ex:

At the outset bill of exchange/promissory note was issued at 1 May 2001 and payable on 7 August 2001.
Notes on Negotiable Instruments 3
Atty. Abelardo Dumaguing

Baguio City
1 May 2001
P8,000.00
I promise to pay to Ana or bearer the sum of eight
thousand pesos on 7 August 2001.
(Sgd) Pablo

- Overdue and yet it was endorsed payable on demand

- When you indorsed an overdue instrument then it is payable on demand

Sec. 47 An instrument negotiable in its origin continues to be negotiable until it has been restrictively indorsed or
discharged by payment or otherwise. (ex: destroying the instrument)

STALE CHECK (when not presented for payment within 6 months)


Stale check can still be negotiated but it needs the replacement of new one.

(nb: check cannot be overdue because it is payable on demand)

STALE DEMAND (by laches)


FIXED FUTURE TIME
Ex: Christmas day of 2001

DETERMINABLE FUTURE TIME


Day certain

How to determine with reference to the happening of a specified event that is sure to happen but it cannot be known
when.

Ex: Death of any being

P50,000.00
I promise to pay to the order of Berto fifty thousand
pesos 1 week after his only carabao will die.
(Sgd) Harry Potter
Carabao will die specified event

P80,000.00
I promise to pay to the order of Claro eighty thousand
pesos 1 month after his only cow will die of syphilis.
(Sgd) Harry Potter
Cow will die of syphilis not sure to happen

Payable upon a contingency


Under last paragraph of Sec. 4, an instrument payable upon a contingency is not negotiable and the happening of the
event does not cure the defect.

Q: What if the only cow of Claro will die of syphilis?


A: The instrument is still not negotiable because the happening of the contingent event does not cure the defect. (Sec. 4
last par.)

*Day certain

PAYABLE TO ORDER
Sec. 8 Payable to
i. the ORDER of a specified person or
ii. a specified person or his order.

Order or a specified person


Ex: to the order of Juan

Specified person or his order


Ex: to Juan or (his) order
In this instance, payment is not limited to Juan but also to the pleasure of Juan (eg: by indorsing, signing at the back of
the instrument and deliver it to somebody)

NOT NEGOTIABLE, if payable to SPECIFIED PERSON because there is a limitation.

*Sec. 34 Indorsement
Notes on Negotiable Instruments 4
Atty. Abelardo Dumaguing

PAYABLE TO BEARER (Sec. 9)


5 Instances:
1. EXPRESSLY (eg: Pay to BEARER)
2. Person named/specified therein or BEARER (eg: Pay to Jose [payee] or bearer)
Sec. 8, last par. when the instrument is payable to order the payee must be named or otherwise indicated
therein with reasonable certainty.

Payee person specified in the instrument


Sec. 9 no need of specifying the person

Q: How to know if the instrument is payable to bearer?


A: See Sec. 9

In, ORDER payee must indorse it first


In, BEARER payee does not need to endorse

3. FICTITIOUS PERSON/PAYEE and such is known to the person making it payable.


(eg: Pay to the order of Tarzan)
4. NAME OF THE PAYEE DOES NOT PURPORT TO THE NAME OF ANY PERSON
(eg: Pay to the order of CASH)
nb: the word order is not the controlling factor
5. WHEN THE ONLY OR LAST INDORSEMENT IS AN INDORSEMENT IN BLANK (in relation to Secs. 33 and 34

1. Fictitious
2. Expressly made payable
3. Not named
4. Indorsement in blank
5. Specified (named)

BLANK INDORSEMENT
- signature affix, written at the back of the instrument
- made by the payee who is first to indorse

CLASSIFICATIONS OF INDORSEMENT
1. Blank indorsement
- an indorsement that does not specify the indorsee
Ex:
Baguio City
22 November 2001
P50,000.00
I promise to pay to the order of Ruby the sum of fifty
thousand pesos.
(Sgd) Harry Potter

At the back

To: (Sgd)
Ruby

2. Special indorsement
- one that specifies the indorsee
Ex:
Face of instrument (same as above)

At the back

To: Rosanna (Sgd) Ruby


To: (Sgd)
Rosanna
(blank indorsement)
-This is payable to bearer because last indorsement is in blank, hence the whole instrument is converted to payable to
bearer(blank indorsement)

-Last indorsement matters

-not permitted to alter the instrument (that is: in words) to make it payable to bearer.
-impossible and illegal to make an instrument payable to bearer to become payable to order.
Notes on Negotiable Instruments 5
Atty. Abelardo Dumaguing

UNCONDITIONAL PROMISE OR ORDER TO PAY A SUM CERTAIN IN MONEY

Sec.2 the amount payable remains a sum certain although it is to be paid with an interest by stated installments with an
acceleration clause although it is to be paid with exchange with cost of collection or an attorneys fee. (keyword: CESIA
Cost, Exchange, Stated, Interest, Acceleration)

1. with an INTEREST
-must be in writing to be binding on the debtor (Art. 1956, NCC)

Ex: Bill of Exchange/Promissory Note


-obligor bound himself to pay interest as written on the face of the instrument.
1.
22 November 2001
P10,000.00
I promise to pay to the order of Pedro ten thousand
pesos with an interest of 2% per month on 22 January
2002.

(Sgd) Harry Potter


-amount is payable in sum certain although it is with interest

-P10,400.00 due on 22 January 2002

2.
P12,000.00
I promise to pay to Maria or bearer the sum of twelve
thousand pesos with an interest on 22 April 2002.

(Sgd) Harry Potter


-even if rate of interest is not specified, the legal rate of interest shall be applied. (Central Bank Circular #416 the legal
rate of interest is 12% per annum)

Bill of Exchange/Promissory note representing balance of installment sales (6% pa interest)


-obligation arises from a sale

Sec. 1 amount payable sum certain


Sec. 2. sum certain but to pay by stated installment, with an interest, acceleration clause, exchange, cost of
collection/attorneys fee (CESIA)

Nb: 1) It must be EXPRESSLY STATED that there is payment of interest (Art. 1956, NCC)
2) If there is stipulation but no rate then legal rate of interest applies.

2. STATED INSTALLMENT
The following must be specified:
a. Amount of each installment and
b. Due date for each installment

If there is not amount and due date specified the it is NOT NEGOTIABLE because the amount will be uncertain.

PAYABLE BY INSTALLMENT
Ex:
Negotiable; amount sum certain
P20,000.00
Pay to Adquilen or bearer the sum of twenty thousand
pesos by installment as follows:
a) P3,000.00 due on 1 January 2002
b) P4,000.00 due on 2 February 2002
c) P5,000.00 due on 3 March 2002
d) P2,000.00 due on 4 April 2002
e) P6,000.00 due on 5 May 2002

To: Reynaldo (Sgd) Harry


Potter
Notes on Negotiable Instruments 6
Atty. Abelardo Dumaguing

Negotiable; amount sum certain


P16,000.00
Pay to the order of Indong the sum of sixteen
thousand pesos on two(2) equal installments the first to
b due on 6 July 2002 and the other to be due on 16
July 2002.

(Sgd) Harry Potter

To: Reynaldo (or with reasonable certainty)

NOT NEGOTIABLE
P12,000.00
I promise to pay to the order of Gandeza the sum of
twelve thousand pesos by stated installments on 1
January 2002 and 2 February 2002.
(Sgd) Harry Potter

3. ACCELERATION CLAUSE
Definition: with a provision that upon default the whole amounts shall become due.

Stated installment but in default the whole shall become due.

Ex:
NEGOTIABLE
P20,000.00
Pay to Adquilen or bearer the sum of twenty thousand
pesos by installment as follows:
a) P3,000.00 due on 1 January 2002
b) P4,000.00 due on 2 February 2002
c) P5,000.00 due on 3 March 2002
d) P2,000.00 due on 4 April 2002
e) P6,000.00 due on 5 May 2002

In the event there is failure to pay anyone of the


foregoing installments then the entire remaining
obligation as of the time of default shall immediately
become due.

To: Clara (Sgd) Harry


Potter

4. EXCHANGE
-difference in value of same amount of money by different countries
Ex
US$1 and Canadian$1
(here, the US dollar is more valuable. Their difference is called EXCHANGE)

Exchange must be at:


1. Fixed rate
-by agreement of the parties

2. Current rate
-average rate that will be prevailing at the time of the transaction during a particular date.

Ex: of an instrument payable with an EXCHANGE


California USA
26 November 2001
US$2,000.00
Pay to the order of Jose the sum of two thousand US
dollar in Philippine peso at a rate of P51.00 per dollar
on 25 December 2001.

To: Maria (Sgd) Harry


Potter
Notes on Negotiable Instruments 7
Atty. Abelardo Dumaguing

US$2,000.00
Pay to the order of Juan de la Cruz the sum of two
thousand US dollar in Philippine peso at the current
rate of exchange.

To: Clara (Sgd) Harry


Potter
-here, the instrument is payable on demand because no time of payment is made

-current rate at the time of the payment prevails (Ponce vs CA, 90 SCRA 332)

5. COST OF COLLECTION OR/AND ATTORNEYS FEE


-does not include any other expenses
Ex:
P50,000.00
I promise to pay to the order of Juan de la Cruz fifty
thousand pesos on 16 January 2002.
In the event I fail to pay and as a consequence a
case will be filed against me, I bind myself to pay an
additional amount equivalent to 20% of the principal
obligation to pay cost of collection or attorneys fee.

(Sgd) Harry Potter

SECTION 3
-Promise is unconditional

ORDER/PROMISE to pay remains UNCONDITIONAL although couple with:


1. An indication of particular fund
-for reimbursement

2. Statement of the transaction which gave rise to the instrument.

-a mere statement on how come the instrument was issued in ONLY a statement stating WHAT TRANSPIRED between
the parties as a consequence of it the instrument was issued.

P50,000.00
I promise to pay to the order of Reynaldo the sum of
fifty thousand pesos on 5 May 2002.
This promissory note was executed by me because
of the fact that I purchased from the payee a
Mitshubishi Lancer car model 1964 with plate number
ADB398 and the aforesaid amount represents my
balance on that sale.

(Sgd) Harry Potter


-In the first paragraph, the promise to pay is absolute

-In the second paragraph, mere statement of what transpired.


Q: What prompted Harry to issue the promissory note?
A: There was a sale/transaction

P50,000.00
I promise to pay to the order of Reynaldo fifty
thousand pesos after he will sell to me his car with
plate number ADB 398.
(Sgd) Harry Potter
Q: Is this negotiable?
A: It is NOT because the condition is unconditional.

INDICATION OF PARTICULAR FUND OUT OF WHICH THE REIMBURSEMENT IS TO BE MADE

FUND is a source of reimbursement


i. It can be where the drawee can be reimbursed, or
ii. Where the drawee may be able to compensate for what he will pay
Notes on Negotiable Instruments 8
Atty. Abelardo Dumaguing

Last paragraph of Sec. 3


-but an order or promise to pay out of a particular fund is not unconditional. (here, the FUND means the actual
source of payment)

Fund as source of payment vs. Fund as source of reimbursement

Fund as source of payment


Ex:
P10,000,000.00
Pay to the order of the DPWH the sum of ten million
pesos on 15 January 2002 out of the fund in the
National Government Treasury.

(Sgd) Auditor General


To: The Treasurer of the Philippines
-fund is mentioned
-this is NOT NEGOTIABLE (but valid) because the order to pay is conditional for it is payable out of particular fund.
-it is conditional because payment depends on a condition that the fund indicated is sufficient (Payment is based in
contingency, that is the availability of funds.

A TREASURY WARRANT is not negotiable because it is payable out of a particular fund.

-DRAWEE IS REQUIRED TO PAY BUT WHETHER HE CAN BE REIMBURSED OR NOT IS BESIDE THE POINT

P90,000.00
Pay to the order of Pedro or bearer the sum of ninety
thousand pesos and reimburse yourself out of money
which is in your custody.

(Sgd) Harry Potter (drawer)


To: Marlon (drawee)
-here, the fund is the money of the drawer in the possession of the drawee. (the fund here is the source of payment)

-The drawee will pay whether the fund indicated is sufficient or not.

SEC. 5 (provisions that do not affect the negotiability of the instrument)


They are the following:
1. Sale of collateral securities
2. Confession of Judgment
3. Waives the benefit of any law
4. Gives the holder an election/(option) to require something to be done in lieu of payment of money.
(keyword: COWS: Confession, Option, Waives, Sale)

Sec. 5(d)
Holder:
1. May demand MONEY or
2. Something to be done (ie: performance of an act)

Sec. 5 Par. 1 (where it adds act) NOT NEGOTIABLE

ACT + MONEY = NOT NEGOTIABLE


Ex:
P20,000.00
I promise to pay to the order of Ruby the sum of
twenty thousand pesos and deliver two(2) cows to the
holder.

(Sgd) Harry Potter


-NOT NEGOTIABLE because it will be hard to determine the liability of the indorser.

Where the holder has the option (or election to require something to be done)
Ex:
P10,000.00
I promise to pay to the order of Ruby the sum of ten
thousand pesos or deliver a carabao at the option of
the holder.
(Sgd) Harry Potter

Q: Who has the privilege of choosing?


Notes on Negotiable Instruments 9
Atty. Abelardo Dumaguing

A: The HOLDER (ie. Last indorser/bearer but never to the drawer or drawee) not the maker or payee. Even if it is a Bill of
Exchange (not the drawer or drawee)

Sec. 5 (a) Sale of Collateral Security


-maker makes assurance of payment (ex: execution of mortgage)

Collateral Security
-refers to a property constituted to guarantee satisfaction or payment of obligation.
Ex:
P50,000.00
I promise to pay to the order on 5 May 2002. This
obligation is secured by a mortgage involving my car, a
Mitshubishi Lancer with plate numbe ADB 398 which
may be sold by the holder in a public auction sale and
the proceeds thereof may be applied to satisfy the
aforesaid obligation, in the event this note is not paid at
maturity.
For this purpose, I hereby appoint the holder as my
attorney in fact to undertake the public auction sale in
my behalf.
(Sgd) Harry Potter
-Any holder can make the auction

-in the event this note is not paid at maturity this is not a condition

-The car can be sold at public auction sale if note is not paid at maturity.

-Selling the car here is not a condition; it is only an option of the holder.

-Source of payment does not come from the proceed of the sale.
-Here, there is authority of the holder to sell collateral security
Ex:
P50,000.00
I promise to pay to the order of Ruby fifty thousand
pesos on 5 May 2002 after I am able to sell my
Mitshubishi Lancer Car with plate number ABD 398 in a
public auction sale to be undertaken by me or my
attorney in face.

(Sgd) Harry Potter


-NOT NEGOTIABLE because there is a condition. Payment depends on the sale of the car.

Sec. 5 (b)
3 forms of Confession of Judgment
1. WARRANT of Attorney
2. Cognovit Actionem
3. Relicta verificationem

Warrant of attorney
-Confession of judgment made before an action filed in the court

In this jurisdiction this form of judgment is VOID because:


1. It enlarges the field of fraud;
2. It denies a party his day in court; and,
3. It deprives a party his statutory right to appeal.

If warrant of attorney is made as if note warrant of attorney is made at all

Confession of judgment means that the obligor acknowledge his liability that may arise from the instrument.

Cognovit actionem
-one that is made after a case has been filed in court.

*This is VALID in this jurisdiction.

Relicta actionem
-similar to cognovit actionem, valid also in this jurisdiction, but here, the defendant or the respondent initially raise a
defense against a claim but later on abandons this defense.
Notes on Negotiable Instruments 10
Atty. Abelardo Dumaguing

Ex:
Defendant denying that he paid the liability, but the abandonment is tantamount to a liability.

P50,000.00
I promise to pay to the order of Ruby fifty thousand
pesos on 6 June 2002. In the event I failed to pay the
aforesaid obligation and as a consequence thereof a
case should be filed against me in court for collection
of sums of money, I hereby authorize Pedro as my
attorney in fact to acknowledge in my behalf the liability
that may arise from the issuance of this note.
(Sgd) Harry Potter

If warrant of attorney is made as if no warrant of attorney is made at all.

Sec. 5 (c)
-obligor = drawer/indorser in relation to Sec. 89
Sec. 89
-person secondarily liable (referring to the drawer/indorser) is entitled to a notice of dishonor.

Q: What is the advantage of the person secondarily liable?


A: He can be discharged/relieved from liability.

NOTICE OF DISHONOR
-notice to be made by the holder informing the person secondarily liable the fact that the instrument was refused payment
or acceptance.

Q: What is the form of the notice?


A: It must be in writing (for convinience).

BP 22 is not the same with Sec. 89 of NIL

Ex: Bill of Exchange


P20,000.00
Pay to the order of Ruby twenty thousand pesos on 3
March 2002.
Notice of Dishonor is hereby waived.

(Sgd) Harry Potter (drawer)


To: Reynaldo (drawee)
-even if one does not receive a NOTICE, he is still liable.

Sec. 6
1. Omissions (may be intentional or not)
2. Additions

INTENTIONAL OMISSION: the instrument:


1. is not dated
2. does not specify the value given
3. does not specify the place where it is issued or drawn

ADDITIONS
1. seal
2. particular kind of current money which payment is to be made (ie: designating of denomination)

NOT DATED
-When the promissory note is not dated, and one does not know when it was executed, then he can put the date of issue
[Sec. 17 (c)]

DOES NOT SPECIFY THE VALUE GIVEN


-There is a presumption that it is in exchange of a valuable consideration (Sec. 24 Presumption of Consideration)

PLACE (issued/drawn)

See: Sec. 17 in relation to Sec. 73 (Place of presentment)


Notes on Negotiable Instruments 11
Atty. Abelardo Dumaguing

In his (obligors)
1. residence
2. place of business, or
3. in any other place where he could be found.

Promissory note vs Bill of Exchange


PROMISSORY NOTE BILL OF EXCHANGE
-Unconditional promise -Unconditional order
-4 essential elements -5 elements
1. Unconditional promise 1. Unconditional order in writing
2. Signed by maker 2. Addressed by one person to another
3. Payable on demand or at a fixed or 3. Signed by the person issuing it
determinable future time 4. Order to pay on demand or at a fixed or
4. Payable to bearer or order determinable future time a sum certain in
money
5. Order to pay must be to order or to bearer.

-drawee must be named

-may be presented for acceptance


-need not be presented for acceptance -three parties
-two parties (originally) -drawer is secondarily liable
-maker is primarily liable

PRESENTMENT FOR ACCEPTANCE


-drawer may be liable under Sec. 62 once the bill of exchange has been accepted.

Sec. 60: liability of the maker


-maker is the person to whom you should present the instrument first
-maker is principally liable

*In a bill of exchange, the one primarily liable is the drawee.

Bill of Exchange vs Check


Bill of Exchange Check
-payable on demand or at a fixed or determinable -always payable on demand
future time
-drawee may not be a bank -drawee is always a bank
-act of issuing without sufficient fund is NOT -act is CRIMINAL
CRIMINAL
-may be presented for acceptance -need not be presented for acceptance

CROSSED CHECK [Generally]


Baguio City
6 December 2001

P80,000.

Pay to the order of CASH the amount of eighty thousand pesos.

(Sgd) Harry Potter


To: PNBank

CROSSED CHECK
1. Generally crossed by 2 diagonal parallel lines at the upper left corner of the check or
instrument.
2. Specially

The example is GENERALLY CROSSED CHECK

SPECIALLY CROSSED CHECK


Ex:

Baguio City
6 December 2001
Notes on Negotiable Instruments 12
Atty. Abelardo Dumaguing

P80,000.

Pay to the order of CASH the amount of eighty thousand pesos.

(Sgd) Harry Potter


To: PNBank
-specific name of a bank is written in between the 2 diagonal parallel lines.

-named bank merely becomes a drawee bank

PURPOSE OF CROSSED CHECK


1. It will be for deposit
2. Negotiated only once by the payee
-drawee has issued that crossed check to see to it that the particular objective will be achieved.

DRAFT/BANK DRAFT
-a check drawn by one bank against another bank.

Addenda:
1) Sec. 184 Promissory Note: Unconditional promise in writing
Sec. 126 Bill of Exchange: Unconditional order

2) Promissory Note 4 Elements

3) PN not presented
-maker, when he presents PN = payment

BOE presented for acceptance or payment

Upon acceptance drawee becomes primarily liable under Sec. 62

4) PN 2 parties (maker and payee)


BOE 3 parties (1. drawer issues instrument; 2. payee; 3. drawee whom the instrument is addressed [required to
pay])

Sec. 126

5) Maker liable
-pay instrument according to the tenor of Sec. 60.
-person directly responsible to pay to whom instrument should be presented first

If he refuses to pay then go to the person who indorse it.

BOE: drawer secondarily liable


Drawee primarily liable

-Any indorser is also secondarily liable.

Check drawn for specific amount but not sufficiently funded with the drawee and is subsequently dishonored (bouncing
check) by the drawee.

Sec. 6 Addendum:

A. Seal, not essential


1) For advertisement
2) For identification
3) For embellishment

B. Designation of particular kind of current money in which payment is to be made


-denomination

P100,000.00
Marlon promised to pay to the order of Reynaldo one
hundred thousand pesos with use of 100 pieces of
P100 bills.

(Sgd) Harry Potter


-payment of P100,000 with the use of P100 bills
Notes on Negotiable Instruments 13
Atty. Abelardo Dumaguing

-specify denomination but not condition simply a designation of the denomination used.

As differentiated with:
Sec. 2 amount payable is to be made in exchange (speaks of two kind of currency)

Sec. 184
To pay on
1. Demand
2. Fixed future time, or
3. Determinable future time
A sum certain in money to order or a bearer

CASHIERS CHECK
-check drawn by a cashier of a particular bank against the same bank where he is employed as a cashier.
Effect: as good as cash, but not a legal tender

Date of payment
-takes the effect of payment when encashed

MANAGERS CHECK
-check drawn by a manager of a particular bank against the same bank where he is employed as manager
-as good as cash, but not a legal tender
-takes effect when encashed

BLANK CHECK
-incomplete instrument (Secs. 14 and 15)
-the amount is not yet written

MEMORANDUM CHECK
-contains memorandum to the effect that this will be followed before encashing
-not condition
-guidelines
-written at the back on another paper attach to the check.

GUARANTEE CHECK
-issued to simply guarantee payment of an existing obligation.

ACCOMMODATION CHECK
-issued by drawer who did not receive any valuable consideration for drawing it from the payee or bearer.

Sec. 12
ANTE-DATED POST-DATED
-date earlier than the actual date of drawing or -date later than the actual date of issuance or
issuance drawing the instrument
effect: before encashing, wait for the arrival of post
date

allowed, but VOID if used for fraudulent purpose.

NEGOTIATION
-refers to transfer of instrument
-purpose: makes the transferee becomes holder of the instrument as:
1. Bearer, or
2. Endorser
But, NOT if the transferee if for depositary only.

Q: How to negotiate a BEARER INSTRUMENT?


A: By delivery.

Q: How to negotiate an ORDER INSTRUMENT?


A: By indorsement plus delivery.

INDORSEMENT (Secs. 39 and 40)


-signature affixed at the back of the instrument by the person negotiating it.
Face: signature of the drawer/maker
Back: signature of the person negotiating it
Ex: FACE
Notes on Negotiable Instruments 14
Atty. Abelardo Dumaguing

Payable to the order of Juan.

BACK

(Sgd) Juan
indorsement

SPECIAL INDORSEMENT
-if indorsee is specifically named

BLANK INDORSEMENT
last indorser
-payable to bearer

Sec. 36 RESTRICTIVE INDORSEMENT


1. Prohibits further negotiation
ex: To: Maria only (-negotiable but ceases to be because further negotiation is prohibited.

2. When it constitutes the indorsee being an agent of indorser


ex: To: Maria for collection only
(Sgd) Harry Potter

3. When it vests title to the indorsee in trust of for the benefit of other persons
ex: To: Maria in trust for my son
(Sgd) Juan

CONDITIONAL INDORSEMENT
-nothing to do with promise or order to pay
ex: To: Maria if she tops the 2001 Bar Exams (not referring with the promise to pay)

Suspensive condition happening of event gives rise to the obligation.

-however, the payee may disregard such condition or vice versa he may not be required to pay without the happening of
the event.

QUALIFIED INDORSEMENT
-indorsee is only an assignee of the indorser
ex: To: Maria sans (without) recourse

indorser indorses the instrument to indorsee for payment from payee, but if drawee is insolvent, indorsee has not
recourse against indorser.(but not for other reason than insolvency)

Sec. 13 INSERTION OF DATE


Purpose: to determine the maturity of the instrument or the amount of interest

INSTANCES WHERE DATE MAY BE INSERTED


1. Instrument is payable at a fixed period after date but the instrument is undated.

2. Instrument is payable at fixed period after sight but the acceptance is undated.

A. Example of fixed period after date


(no date)___________
8,000.00
I promise to pay to the order of Ruby eight thousand
pesos five days after date of this instrument.

(Sgd) Harry Potter


-five days = fixed period
-insert the date of issue, then maturity can now be determined.
Notes on Negotiable Instruments 15
Atty. Abelardo Dumaguing

Sec. 17 (c) where the instrument is not dated

Q: What is the effect of inserting a wrong date and thereafter the instrument is negotiated in due course?
A: Sec 13. Insertion of a wrong date does not avoid the instrument but as to him that is the true date because of the right
of a holder in due course (see: Sec. 57)

Q: Who is a holder in due course?


A: Under Sec. 52, he who: (the conditions)
1. Takes the instrument complete and regular upon its face
2. Takes the instrument before it is overdue
3. Takes the instrument in good faith
4. Takes the instrument without knowledge of the infirmity or defect of the instrument.
(keyword: COGI: Complete, Overdue, Good faith, Infirmity)

Complete and regular upon its face


-all the essential elements are present, including all matters like date.

regular upon its face no suspicion of alteration

before overdue
Ex: Suppose the check was issued on 1 January 2002, today is 7 January 2002, the check is already overdue

for value and in good faith


for value in exchange for valuable consideration

without knowledge of the infirmity or defect

Sec. 59 Presumption: Every holder is a holder in due course (this is a disputable presumption the adverse party
may prove the insufficiency of the conditions)

See: Sec. 52 vs Sec. 59

Sec. 57 Rights of a holder in due course


1. Hold the instrument free form defect (Sec. 13 vs Sec. 57)
2. To enforce the payment in its full amount

See: Sec. 13

B. after sight after is shown/presented for payment and there is acceptance.


Ex: Bill of Exchange
1 January 2002
P10,000.00
Pay to the order of Jose ten thousand pesos six days
after sight.
(Sgd) Pablo
To: Maria
-Jose presented it to Maria for her acceptance
-Maria accepted it with her signature (but no date)
So, the holder must insert the date

Sec. 14 speaks of incomplete instrument however, it was delivered

INCOMPLETE means an essential element is lacking


Ex: NOT SUM CERTAIN IN MONEY
P.00
Pay to the order of Jose the sum of
..

(Sgd) Marta
PNBank

wanting in any material particular (eg: the amount payable is wanting, therefore incomplete)

BUT it can be delivered (but it cannot be negotiated because the instrument is not negotiable for one of its essential
element is absent)
Notes on Negotiable Instruments 16
Atty. Abelardo Dumaguing

-The person in the possession thereof has a prima facie authority to complete it by filling up the blank therein (he is still
a possessor, not still a holder because the instrument is not yet negotiable)

Q: What is the evidence of the authority?


A: The signature on the blank paper.

Q: How to fill up?


A: 1. Fill up the blank strictly in accordance with the authority given
2. Fill it up within a reasonable time
if he exceeds the authority then a holder in due course has a right under Sec. 57

negotiation by delivery = to bearer

Warranties of an Indorser (Secs. 65 and 66)


1. That the instrument is genuine and in all respect what it purports to be;
2. That he has a good title to it;
3. That all prior parties had the capacity to contract;
4. That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless.

ILLUSTRATION OF SEC. 14

FACE
Baguio City
10 January 2002
P__________.00
Pay to the order of Juan the sum of
_________________

(Sgd) Pedro
Land Bank
Facts:
Pedro instructed Juan to put any amount but not exceeding P40,000.00. However, Juan placed P47,000.00.
Subsequently, Juan indorsed the check to Marta.

BACK (Special Indorsement)

To: Marta (indorsee)

(Sgd) Juan

Question #1
Q: As a holder (indorsee), what can Marta do with the check?
A: Marts may:
1. Indorse it further, or
2. Present the check to the drawee bank for payment

Question #2
Q: If Marta chose to present the check for payment but the bank dishonors the check, what must Marta do so that she
can recover from the persons who are secondarily liable?
A: Marta should give notice of dishonor to the persons secondarily liable [ie: 1) the drawer and 2) the drawee]

Q: What if Marta did not give any notice of dishonor?


A: Then the persons secondarily liable are DISCHARGED from liability.

NO form of notice but it must be in writing for purposes of convinience.

Question #3
Q: If Marta is not a holder in due course (ex: she knew of the infirmity/defect), can she enforce the check against Pedro?

A: No. She cannot enforce the instrument against Pedro because the latter can raise the personal defense that the
instrument was filled up not strictly in accordance with the authority given. The law requires that in order that the
instrument may be enforced it must be filled up with authority given and within a reasonable time.

Question #4
Q: Will your answer be the same as in the preceding question if Marta is a holder in due course (ie: she did not know that
there was infirmity/defect and if she knew, she was not a party thereor)?
A: NO. My answer will not be the same as in the preceding question. Marta can enforce the instrument as if it was strictly
filled up in accordance with the authority given and within a reasonable time. (see: last sentence of Sec. 14, NIL) [Sec.
57 Rights of holder in due course]
Notes on Negotiable Instruments 17
Atty. Abelardo Dumaguing

Marta can enforce the instrument free from defect and in its full amount of P47,000.00

Question #5
Q: Can Marta require Juan to pay P47,000.00 if the bank and Pedro do not pay?
A: YES.
Juan warrants Marta that:
1. The check is genuine and in all respect what it purports to be (ie: the amount is correct even if it was written
not strictly in accordance of the authority given)

SEC. 15 INCOMPLETE instrument and UNDELIVERED


undelivered means NO VALID DELIVERY

-no essential particular and no valid delivery

See: Sec 8 payee must be named

-instrument is INCOMPLETE

-COMPLETED and NEGOTIATED without authority

-Effect of signing: the instrument is NOT a valid contract in the hands of ANY HOLDER

-the instrument cannot be enforced by the holder (nb: even holder in due course) against the person who became the
party thereto prior to delivery

ILLUSTRATION:

FACE
P80,000.00
Pay to the order of Mr. ____________________
the sum of eighty thousand pesos .
(Sgd) RUA
To: PNBank

Facts:
Because of his gross negligence, RUA lost his incomplete instrument. Amado was the finder. He (Amado) placed
his name as payee unknown to RUA.
Thereafter, Amado negotiated the check to Lito.

BACK (after completion)

To: Lito

(Sgd) Amado (indorser)

Nb: from Amado to Lito = there is a valid delivery BUT from RUA to Amado = no valid delivery.

-Lito cannot enforce the instrument against RUA if the instrument is dishonored by the bank.

any holder includes holder in due course

Lito cannot enforce the instrument against RUA because the check cannot be valid in the hands of ANY HOLDER. Even if
Lito is a holder in due course he cannot enforce it against RUA considering that RUA was a person who place the
signature in the instrument before delivery.

INCOMPLETE INSTRUMENT INCOMPLETE AND UNDELIVERED


INSTRUMENT
Can be enforced by a holder in due course Cannot be enforce by a holder in due course
Notes on Negotiable Instruments 18
Atty. Abelardo Dumaguing

FACE
P____________.00
Pay to BEARER the sum of
____________________

(Sgd) Amado
To: Land Bank

Facts:
Amado placed this incomplete instrument in his cabinet. Rey took it without the consent of Amado.
Subsequently, Rey put the amount of ninety thousand pesos. Later, Rey indorsed it to Bartolo.
Bartolo presented the instrument to the bank but it was dishonored. He gave a notice of dishonor to Rey and
Amado.

BACK (after completion)

To: Bartolo

(Sgd) Rey

Read: Sec. 40 in relation to Sec. 30

In instrument payable to bearer = it can be negotiated by DELIVERY only, NO NEED TO INDORSE

Sec. 40: Payable to bearer can be indorsed but it may not be necessary because Sec. 30 payable to bearer is
negotiated by delivery.

- the instrument must be incomplete and undelivered

Question #1
Q: Can Bartolo require Amado to pay P90,000.00
A: NO.
Reason: The check is not a valid contract in the hands of any holder. Bartolo cannot enforce against Amado because
Amado is the person who placed his signature before delivery.

Question #2 (use Sec. 65 in relation to Sec. 66: WARRANTY)


Q: Can Bartolo require Rey to pay P90,000.00?

[additional facts: Rey made a SPECIAL INDORSEMENT (this made Amado a general indorser) and since Rey
indorsed it, Sec. 66 applies, otherwise, Sec. 65 applies]

A: YES. Bartolo can require Rey to pay the P90,000.00.


As an indorser Rey warrants to Bartolo that the instrument is genuine and in all respects what it purports to be.
[Rey incurred his warranty when he indorsed the check/instrument to Bartolo; nb: Amado is a drawer and he has
NO WARRANTY, it is only the INDORSER who warrants]

Even if Rey has no valid title, as far as Bartolo is concern Rey has a valid/good title because Rey warrants this.

Amado has a real defense (ie: the instrument is NOT a valid contract in the hands of any holder) under Sec. 15.

Sec. 14 is only a PERSONAL DEFENSE (that the instrument was filled up not strictly in accordance with the
authority given)

USE Sec. 65 when:


1. There is a qualified indorser
2. When the instrument is negotiated by delivery only

USE Sec. 66 when:


1. One indorses an instrument without qualifications, or
2. One is a general indorser (and this includes special indorser)

SEC. 16 (here, no problem about the instrument for it is COMPLETE but it is UNDELIVERED)

undelivered means NO EFFECTUAL DELIVERY (ie: no legal effect)

*There must have been a delivery BUT not effectual (eg: delivery was made by a person not authorized)
Notes on Negotiable Instruments 19
Atty. Abelardo Dumaguing

Q: When will the delivery be considered effectual?


A: If the delivery is made by the drawer/maker (indorser/acceptor or anyone who is authorized by him). [it must be made
either BY THE AUTHORITY or UNDER THE AUTHORITY of the person making, drawing, indorsing, accepting]

-The instrument is COMPLETE but CONTRACT involving the complete instrument is INCOMPLETE if there is NO
DELIVERY.

-Any time before delivery the complete instrument does not produce any legal effect.

KINDS OF DELIVERY
1. Conditional delivery
2. Delivery for a special purpose
3. Delivery not intended to transfer title (it may transfer physical possession but not the title)

Conditional delivery
-happening of the suspensive condition the delivery becomes effectual

Delivery for a special purpose


-to make the person to whom it is delivered a trustee or depositary (ie: special purpose of safekeeping)

Q: What is the consequence if there is NO EFFECTUAL DELIVERY but it is in the hands of a holder in due course?
A: There is a conclusive presumption that there is a valid and intentional delivery by all parties prior to him (holder in due
course). [All these prior parties can be liable to a holder in due course]

TERMS in Sec. 16
1. IMMEDIATE PARTY refers to the one who knows the defect/infirmity of the instrument (this does not mean
proximity)
2. REMOTE PARTY OTHER THAT HOLDER IN DUE COURSE refers to a party who is not aware of the
defect/infirmity of the instrument (eg: one who received an instrument after overdue)

P80,000.00
Pay to the order of Juan eighty thousand pesos.

(Sgd) Pedro
To: Land Bank

Facts:
Pedro signed this instrument, put it in his cabinet and the sister of Juan took it without Pedros consent.
The sister of Juan delivered the instrument to Juan but she is not authorized by Pedro.
Later, Juan indorsed the instrument to Harry.

BACK

To: Harry

(Sgd) Juan

Harry is still an IMMEDIATE PARTY as long as he is aware that the instrument was not deliverd by Pedro (NOT
PROXIMITY)

BUT, If Harry is NOT AWARE but the check is overdue, then Harry is a REMOTE PARTY OTHER THAN HOLDER IN
DUE COURSE

Question #1
Q: As a holder in due course what may Harry do with the check?
A: Harry can 1) present the check to Land Bank for payment, or 2) indorse if further.

Question #2
Q: If Harry presents the check to the Land Bank for payment but the bank refuses to pay, what should Harry do so that he
may be able to recover?
A: Harry shall give a notice of dishonor to Pedro and Juan.

Question #3
Q: If Harry is not a HOLDER IN DUE COURSE can he require Pedro to pay P80,000.00?
A: NO.
Reason: There is no effectual delivery because the check was not delivered by or under the authority of Pedro.
Notes on Negotiable Instruments 20
Atty. Abelardo Dumaguing

Question #4
Q: Will your answer be the same as in the preceding question if Harry is a holder in due course?
A: See: Sec 16, last sentence: 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 proven.

In the hands of a holder in due course, a valid and intentional delivery is conclusively presumed to have been
made by all parties prior to him (holder in due course) [until the contrary is proven]

***Juan is a prior party and he warrants

Question #5
Q: If Harry decides to go against Juan will the latter be liable?
A: YES.
Reason: Juan as indorser warrants that he has a good title to the check (see: Sec. 65)

ANOTHER ILLUSTRATION OF SEC. 16

P80,000.00
Pay to the order of Juan eighty thousand pesos.

(Sgd) Pedro
T: Land Bank

Facts:
Pedro instructed Juan to indorse this check until such time the latter will be able to complete the construction of
Pedros house.
Construction has never started when Juan indorsed the check to Ruby.
Subsequently, Ruby indorsed the check to Clara.

BACK

To: Ruby
(Sgd) Juan
To: Clara
(Sgd) Ruby

Question #1
Q: If Clara is not a holder in due course can she require Pedro to pay after giving him notice of dishonor?
A: NO.
Pedro has a personal defense that there was no effectual delivery of the instrument considering that delivery was
conditional and the suspensive condition was not fulfilled. (Juan was not acting under the authority of Pedro).

Question #2
Q: Will your answer be the same as in the preceding question if Clara is a holder in due course?
A: NO. My answer is not the same as in the preceding question because Clara can require Pedro to pay because the law
provides that when the instrument is in the hands of a holder in due course a valid and intentional delivery by all
parties prior to him (holder in due course) so as to make them (prior parties) liable to her, is conclusively presumed.
(Clara holds the instrument as though there was a valid delivery from Pedro, Juan and Ruby)

Question #3
Q: As a holder in due course, can Clara require Juan to pay?
A: YES. Clara can require Juan to pay (*warranty of Juan extends beyond Ruby)
[See: Sec. 66, opening sentence (every indorser who indorses without qualification, warrants, to all subsequent
holders in due course ) in relation to Par(b) of Sec. 65 (that he has a good title to it)]

Juan is a general indorser and he warrants ALL SUBSEQUENT HOLDERS IN DUE COURSE that he has a good
title.

Question #4
Q: If Clara fails to find Pedro and Juan, can she require Ruby to pay?
A: YES. Clara can require Ruby to pay because the latter is a general indorser and such she warrants that the check is
genuine.
Notes on Negotiable Instruments 21
Atty. Abelardo Dumaguing

NOTES:
-Check is complete, therefore, negotiable.
-Delivery is conditional (ie: construction)
-The suspensive condition was not fulfilled, therefore, the delivery is NOT EFFECTUAL.

Juan was not acting under the authority of Pedro because of the non-fulfillment of the obligation, therefore, no
effectual delivery to Ruby (as far as Pedro is concern)
SEC. 14 vs SEC. 15 vs SEC. 16
Sec. 14 Sec. 15 Sec. 16
1. INCOMPLETE instrument but DELIVERED. 1. INCOMPLETE instrument but UNDELIVERED. 1. COMPLETE instrument but UNDELIVERED

2. A Personal Defense (can be availed of only as against 2. A Real Defense (can be availed of even as against a 2. A Personal Defense (can be awaited of only against a
a holder who is NOT a holder in due course). holder in due course) holder who is not a holder in due course).

3. DEFENSE: That the instrument was filled up NOT 3. DEFENSE: That the instrument is NOT A VALID 3. DEFENSE: That there is NO EFFECTUAL DELIVERY
STRICTLY in accordance with authority given and with a CONTRACT in the hands of any holder. of the instrument because:
reasonable time.
a) The delivery was conditional and the
suspensive condition was not fulfilled.
OR
b) The delivery was special purpose only
and the instrument was not intended to be
negotiated.

4. Cannot be enforced by one who in not a holder in due 4. Cannot be enforced even by one who is a holder in 4. Cannot be enforced by one who is NOT A HOLDER IN
course. due course. DUE COURSE.
Against whom? Against a person who placed his Against whom? Any person who became a party prior to Against whom? Person who placed his signature before
signature thereon prior to the completion. completion or delivery. delivery of instrument.

5. In the hands of a holder in due course, the instrument 5. In the hands of any holder, the instrument is not a valid 5. In the hands of a holder in due course, a valid and
is AS IF it was filled up strictly in accordance with the contract. intentional delivery by all parties prior to a holder in due
authority given. course is conclusively presumed. All such prior parties
may be liable to the holder in due course.

In NIL, equity = personal defenses


Sec. FORGERY (limited to the defect in the signature)
(NOT: if the sum certain is changed from P10,000.00 to P100,000.00 (this example is a material alteration)

Forgery may mean:


1. Counterfeit-making (similar to feigning, faking, or simulating) of anothers signature with the INTENTION TO
DEFRAUD him (this is intention to defraud is essential to constitute forgery)
2. Signature obtained through fraud (ie: fraud in factum)
Ex: a person signs a paper not knowing that the paper will be made a negotiable instrument.
3. Signature obtained through irresistible force or uncontrollable fear.
4. Signature place without authority.

Forgery is a real defense

THE EFFECTS OF FORGERY:


1. The forged signature is rendered WHOLLY INOPERATIVE (when it does not operate to create or give rise to a
liability).
2. NO right to RETAIN the instrument (as far as the one who signed is concern)
3. NO right to ENFORCE the instrument can be acquired.
4. NO right to give a DISCHARGE can be acquired.
- the acceptor/drawee has no right to accept payment or pay the instrument as far as the person whose signature
was forged.

-if the drawee bank pays then I cannot debit against the drawers (whose signature was forged) account.

Nb: the instrument can still be validly negotiated but ONLY the forged signature is rendered INOPERATIVE.

WHO MAY BE LIABLE IN CASE OF FORGERY


1. The forger
- the forger is precluded from setting up forgery as a defense.

2. The subsequent indorser (he is an indorser who makes his indorsement after forgery is committed. (also
precluded from setting up forgery as a defense.)
Reason: The indorser warrants (Secs. 65 and 66)

3. The acceptor/drawee who accepts an instrument where the signature of the drawer was forged (also precluded
from setting up forgery as a defense.)
See: Sec. 62

REMEDY: Dishonor the instrument if there is a doubt in the signature.

FORGERY
Payable to ORDER
Forgery in the signature of the drawer is a real defense by the DRAWER.

Drawers defense: that the forged signature is rendered wholly inoperative (ie. He [the drawer] will never be liable in that
forged signature)

Forgery in the signature of the payee is a real defense by BOTH the drawer and payee (or original indorser).

Drawers defense: that he is not liable because of lack of valid indorsement by the payee.
(NB: In an instrument that is payable to order, a valid indorsement by the payee is necessary to negotiate the instrument,
sec. 30)

Payees defense: that the forged signature is rendered wholly inoperative.

Face
P80,000.00
Pay to theORDER of Amado eighty thousand
pesos.
(Sgd)
Pedro
To: PNBank
This instrument was forged by Amado.
Back
To: Bella
(Sgd
) Amado
To: Harry
(Sgd
) Bella

QUESTIONS:
1) If the bank dishonors the check and H gives notice of dishonor to Pedro, is the latter liable?
Ans: No. The forged signature is wholly inoperative. (real defense)
Pedro will never be liable for that signature because Harry did not acquire any right to enforce payment of the
instrument, based on that signature, against the person whose signature was forged. (NB: even if you are a holder in due
course)

2) If Harry gives notice of dishonor to Amado, can Harry recover from the former?
Ans: Yes. Reason: he is a forger and as such he is precluded from setting up forgery or want of authority as a defense.
As a general indorser, he warrants under Art. 66 that the signature is genuine and in all respects what it purports
to be

3) If Harry gives notice of dishonor to Bella, will Bella be liable to pay?


Ans: Yes. Reason: She is a subsequent indorser and precluded from setting forgery as a defense. And by indorsing the
check, she warrants to Harry that the instrument is genuine and in all respects what it purports to be.

Forged instrument in hands of a HOLDER IN DUE COURSE cant be enforced for payment.

Forged signature does not make you liable to the instrument

NB: When the payees signature was ONLY forged, the payee and the drawer can still avail of the real defense. Reason:
No valid indorsement by the payee.
(see: sec. 30 indorsement + delivery)

Illustration (forgery in the signature of the PAYEE)

Face
P80,000.00
Pay to theORDER of Juan eighty thousand pesos.
(Sgd)
Berto
To: Land Bank

Back
To: Pablo
(Sgd
) Juan
To: Harry
(Sgd
) Pablo
This payees (aka orginal indorser) signature is forged by Pablo.

QUESTIONS:
1) If The bank does not pay Harry and Harry gives notice of dishonor (NOD) to Berto, is the latter liable?
Ans: NO. Berto can set up the real defense that the forged signature of Juan (payee) is wholly inoperative (that is using
the payees forged signature as a real defense).
Berto is not made liable even to a HOLDER IN DUE COURSE bec. of lack of valid indorsement by the payee.

2) If Harry gives NOD to Juan, is the latter liable?


Ans: NO. Reason: Forged signature is rendered wholly inoperative. Juan cant be made liable on the basis of that forged
signature.
As a holder (even HDC), Harry did not acquire any right to enforce the instrument against Juan.

3) If Harry gives a NOD to Pablo, is the latter liable?


Ans: YES. Reason: Pablo is the FORGER and SUBSEQUENT INDORSER. As such, he is precluded from setting up
forgery or want of authority. And he warrants that the instrument is genuine and in all respects what it purports to be.

Face
P60,000.00
Pay to REY or BEARER sixty thousand pesos.
(Sgd)
Pablo
To: PNBank

Back
To: Pedro
(Sgd
) REY
To: Harry

(Delivered by) Pedro
this signature was forged by Pedro
not by indorsement bec. this is a bearer instrument.
NOTE: Under 30, there is no need to indorse the bearer instrument. Negotiation is made by delivery only.
However, under 40, the bearer instrument may be indorsed.

In a bearer instrument, the payee does not need to indorse.

Indorsement by the payee is not necessary to the title of the bearer/holder.

NB: Forgery anent indorsement of the payee is IMMATERIAL or IRRELEVANT (reason: bec. indorsement is not needed in
b.i.).
The bearer/holder acquires title even sans indorsement.

In order instrument, valid indorsement by the payee is necessary to the title of the holder.

QUESTIONS:
1) If the bank does not pay Harry, and Harry gives NOD to Pablo, is the latter liable?
Ans: YES. Pablo is liable to Harry. Pablo cant use forger as a defense bec. the FORGERY is IRRELEVANT.

Sec. 61. Liability of drawer. - The drawer by drawing the instrument admits the existence of the payee and his then
capacity to indorse; and engages that, on due presentment, the instrument will be accepted or paid, or both, according to
its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount
thereof to the holder or to any subsequent indorser who may be compelled to pay it. But the drawer may insert in the
instrument an express stipulation negativing or limiting his own liability to the holder.

2) If Harry gives a NOD to Rey, can Rey avail of the defense of forgery to defeat the claim of Harry?
Ans: NO. Forgery in the indorsement is IRRELEVANT or IMMATERIAL to the title of Harry bec. Harry acquires title even
with or without indorsement for bearer instrument need not be indorsed.

3) What defense which Rey can raise if Harry is not a HDC?


Ans: Rey can avail of the defense of the LACK OF EFFECTUAL or VALID DELIVERY (under 16) NB: This is a personal
defense in forgery NOT a real defense. [16 as personal defense cant be used against a HDC]
***But Rey cant avail of the defense of forgery as REAL DEFENSE if this is a order instrument.

4) If Harry gives a NOD to Pedro, is the latter liable?


Ans: YES. Reason: Bec. he warrants under 65 that he has a good title in the instrument, and no knowledge of any fact
that would impair the validity of the instrument.
*Harry is an IMMEDIATE TRANSFEREE (see: last sentence of 65).

BEARER INSTRUMENT
Face
P60,000.00
Pay to JUAN or BEARER sixty thousand pesos.
(S
gd) Pedro
To: LandBank
this signature was forged by Juan.

Back
To: Nena
(Deli
vered by) Juan
To: Harry

(Delivered by) Nena

QUESTIONS:
1) If the bank does not pay and Harry gives NOD to Pedro, is the latter liable?
Ans: NO. Perdo can set up a real defense that the signature is wholly inoperative, and this does not make Pedro liable.
The Holder did not acquire any right to enforce payment of the instrument against Pedro.

2) If Harry give a NOD to Juan, is the latter liable?


Ans: NO. (See: 65) Warranty extend in favor of NO HOLDER OTHER THAN THE IMMEDIATE TRANSFEREE. [nb: NOT
immediate party]
Harry is not the immediate transferee of Juan.

NOTE: The question here is not of forgery (in 23) but of warranty (in 65). Even if there is forgery, forgery cant always
be availed of as a defense.

REMEMBER: What issue is raised in the problem?

Juan as liable forger does not apply in negotiation by delivery(b.i.)

3) If Harry gives NOD to Nena, is the latter liable?


Ans: YES. She warrants under 65 that the instrument is genuine and in al respects what it purports to be (including
Pedros forged signature), and her warranty extends to Harry as her immediate transferee.

Face
P60,000.00
Pay to JUAN or BEARER sixty thousand pesos.
(S
gd) Pedro
To: LandBank
this signature was forged by Juan

Back
To: Nena
(Sgd)
Juan
To: Harry
(Deliv
ered by) Nena

QUESTIONS:
1) If the bank does not pay and Harry gives NOD to Pedro, is the latter liable?
Ans: NO. Perdo can set up a real defense that the signature is wholly inoperative, and this does not make Pedro liable.
The Holder did not acquire any right to enforce payment of the instrument against Pedro.

2) If Harry give a NOD to Juan, is the latter liable?


Ans: NO. (here, forgery is an incidental matter; the issue is the INDORSEMENT: will the indorsement make him liable?)
Sec. 40. Indorsement of instrument payable to bearer. - Where an instrument, payable to bearer, is indorsed
specially, it may nevertheless be further negotiated by delivery; but the person indorsing specially is liable as indorser to
only such holders as make title through his indorsement.

Apply 40; do not apply 65 bec. it was NOT negotiated by delivery only; see: 66 is applicable but 40 is MORE
PARTICULAR.

Juan is liable as indorser to ONLY such holder as make title through his indorsement, that is TO NENA ONLY.

40 last sentence vs 65 last paragraph : similarity in immediate transferee but different in reasoning.

3) If Harry gives NOD to Nena, is the latter liable?


Ans: YES. She warrants under 65 that the instrument is genuine and in al respects what it purports to be (including
Pedros forged signature), and her warranty extends to Harry as her immediate transferee.

DOCTRINE IN FORGERY
1) San Carlos Milling Co. vs BPI, 59 P 59

Face
US$10,000.00
Pay to the order of San Carlos Milling Co
(Sg
d) Baldwin
To: BPI
Forged by Dolores

Back
To: Hongkong and Shanghai Bank (HSB)

(Sgd) Dolores in
behalf of SCMC

signature of the drawer was forged

DOCTRINE:
A bank (drawee bank) is BOUND to know the signature of its depositors (ie. The drawers). If it pays a forged check
(forged signature of the drawer), it is considered as making payment out of its own funds and cannot debit the amount so
paid against the account of the depositor(drawer) whose signature was forged.

Eg: BPI cannot debit the amount so paid against Baldwin account.

2) GELAC vs HK and Shanghai Bank, 43 Phil 711

Face
P2,000.00
Pay to the order of MELICOR
(Sgd)
GELAC
To: PNBank

Back
To: Maasim
(Sgd)
MELICOR
To: HSB
(Sgd)
Maasim

This was forged by Maasim

this check was drawn by GELAC involving payment of insurance proceeds for MELICOR.

This check was lost and Maasim had possession of the check and tried to make it appear that it was indorsed to him by
MELICOR.

The practice of GELAC is to send the check by mail.

8: order instrument payee must be named.

Maasim deposited the check to HSB and the amount was allowed to be credited in Maasims account, and so he was
allowed to withdraw amount.

HSB presented to PNB. PNB paid.

Now, PNB wants to debit against the deposit account of GELAC.

DOCTRINE:
When a check is payable to the order of a person and it is presented for payment BY ANOTHER it is the duty of
the bank to see to it that the check was duly indorsed by the original payee. (Reason: no valid indorsement)

So, PNB should see to it that MELICOR made a valid indorsement. It cannot debit against the account of
GELAC.

***Forgery in the signature of the payee is a real defense by the drawer.

PNB can go against HSB; HSB can go against Maasim.

3) PNB vs Motor Service, 63 Phil 693

Face

Pay to the order of International Auto-repair Shop


(IARS) or ORDER.

(Sgd) J.
Klar
in behalf of
the PANTRANCO
To: PNB
This was forged

Back
To: Motor Service
(Sgd)
IARS
by
unknown person
To: Natl City Bank of New York (NCBNY)
(Sgd)
Motor Service

When PANTRANCO had repairs it went to IARS

There were two checks involved in this case.


NCBNY presented to PNB for payment then PNB paid NCBNY; PNB wanted to debit the amount against the account of
PANTRANCO.
PNB waived its rights to sue NCBNY thats why it sued Motor Service.

There was negligence on the part of PNB bec. it failed to see to it that the signature of J. Klar is GENUINE. So, PNB is
guilty of CONSTRUCTIVE NEGLIGENCE by not ascertaining of its drawers/depositors signature is genuine or forged.

Motor Service was negligent bec. it accepted indorsement of UNKNOWN PERSON. It should ascertain his identity. So, it
was guilty of ACTUAL NEGLIGENCE in accepting check from persons whose identity remains unknown.

Q: Who shall bear the loss then?


A: The one guilty of actual negligence.

SC: PNB can go against Motor Service and let Motor Service to go against the unknown person.

4) PNB vs CA, 25 SCRA

Face

Pay to the order of Mariano Pulido


(Sgd)
GSIS
To: PNBank

Back
To: Manuel Go
(Sgd)
M. Pulido
To: Lim
(Sgd)
M. Go
To: PCIB
(Sgd)
Lim

PCIB said: all prior indorsements guaranteed

Signatories of GSIS check are manager and auditor

Managers and Auditors signature were forged (this check was lost)

2 months before PCIB went to PNB. GSIS has already notified PNB to stop payment bec. GSIS said that the check was
forged (lost).

But PNB still paid bec. of the ANNOTATION: PCIB guaranteed that the indorsement were GENUINE but not the
signature.

SO, GSIS is not liable bec. its signature is wholly inoperative.

There was GREATER or ACTUAL NEGLIGENCE by PNB.

DOCTRINE OF JUS TERTIIS


When one of the two innocent persons must suffer from a wrongful act of a third person, the one guilty of actual
negligence or who put it into the power of a 3rd person to perpetrate the wrong shall bear the loss.

Here, the 3rd person is the GSIS.

5) Republic Bank vs. Mauricia Ebrada, 65 SCRA 693

Signature of payee (original indorser) was forged.


Ebrada also raised the issue that she was only an accommodation pary (29)
Check payable to the order of a specified person.

DOCTRINE
a person who takes a check or purchases draft is bound to satisfy himself that the check he is taking is genuine,
and by putting it into circulation, or by presenting it for payment or by indorsing it, he impliedly asserts that he has
performed his duty.

Face (GENUINE)

Pay to A or ORDER
(Sgd)
Y
To: Bank

Back (FORGED)
To: B
(Sgd)
A

(Sgd)
B

B presented this to the BANK.

B is the holder.
if B purchases a draft, B should believe in good faith that the check in his possession is genuine.

Drawee bank cannot debit account of Y.


Bank can go against B (basis: one who purchases a draft must satisfy himself that such draft is genuine)

Doctrine in GELAC is not applicable but the doctrine in Rep Bank vs Ebrada does not mean abandonment of ruling in
GELAC case.

6)
Face
P10,000.00
Pay to the order of Inter Island Gas Services, Corp
(IGSP)

(Sg
d) DD
To: VB
10 different drawers in various drawee banks

Back
To: Jai Alai
(Sgd)
IGSCorp
(by A.
Ramirez)
To: BPI
(Sgd)
Jai Alai

BPI credited amount of checks to the account of Jai Alai; VB does not pay.

Signature of Alfredo Ramirez was NOT AUTHORIZED (therefore, forgery)

NOTE: The payee is corporation a corporation can act only through its Board of Directors. The Board can authorize any
of the corporate employees or officers to act for in its behalf.

DOCTRINE:
A person taking a check of corporation (which can act only through its Board of Directors) does so on his own peril when
the one who indorses in behalf of the corporation was in fact not authorized.

If you are the holder, you cannot compel the drawee to pay BUT go against the indorsee, or the person who appear to
be secondarily liable.

bec. VB does not pay, BPI sued Jai Alai.


When Ramirez signed the checks in favor of Jai Alai, the latter should have verified the validity (ie. Authorization of
Ramirez) of the formers signature.
When Jai Alai accepted the checks from Ramirez, he did so in his own peril.\

7) PNB vs CA (1997)

Face
P80,000.00
Pay to the order of Ana eighty thousand pesos.

(Sg
d) Pedro
To: X Bank
This signature was forged.

Back
To: Y Bank (indorsee)
(Sgd) Ana
(indorsed check to
Y Bank [indorser])

Y Bank presented payment by X Bank.

NOTE: X Bank is the drawee bank, Y Bank is the collecting bank (where the payee deposits/indorses the check)
Similar to Rep. Bank vs Ebrada case/doctrine.

DOCTRINE:
A collecting bank incurs the liability of the indorser (warrants the check is genuine)

MATERIAL ALTERATION
It is any unauthorized change in the instrument.
It includes:
a) Change in the amount payable.
b) Change in the maturity date.
c) Change in the number or relation.
d) Change in the nature of the instrument.
e) Adds interest when in fact not stipulated.

EFFECTS OF MATERIAL ALTERATION


1. The instrument is AVOIDED.
2. The instrument cannot be enforced against the party who did not authorize nor assented to the alteration.
3. A HDC can enforce the instrument according to its original tenor. [but not as altered; only the original]
4. Material alteration is a REAL DEFENSE.

Q: Who may be liable in case of alteration?


A: 1) The party who: a)made, b) authorized, c) assented to the alteration.
2) A subsequent indorser bec. of his warranty that the instrument is genuine and in all respects what it purports to be.

Alteration distinguished from forgery


Alteration Forgery
1. It refers to any 1. It pertains to
unauthorized change. unauthorized signature.

2. The forged signature is


2. The instrument is rendered INOPERATIVE.
AVOIDED.
3. The HDC cannot
recover in some
3. A HDC may recover instances.
but is limited only as to
the original tenor.

Secs 124 and 125

AVOIDED, except as to the person who assented or authorized to the alteration.

AVOIDED void as far as the person who did not make or authorized or has assented to the alteration is concern.

You cannot enforce as to the alteration but you can as to the original tenor.

Material alteration substantial change (unauthorized)

Alteration spoliation a material alteration made by a 3rd person or stranger.


- same effects with material alteration done by a party of an instrument.

Change in the amount payable


- increase or decrease

Change in the maturity date


- eg. To make yourself a holder in due course (ie. Before overdue)

Change in the number or relation


- eg. Changing number of indorsements
Change in the nature of the instrument
- eg. Instrument is payable to order then you made it payable to bearer.
- Nb: legal way to change the nature from order instrument to bearer instrument make an indorsement in
blank under 9 last Prgph.

Adds interest when in fact not stipulated

Real defense
You cannot use your unlawful act as a defense

Assented eg. First you did not know the alteration then later you knew, so, you assented.

Illustration (material alteration)

As a drawer Danny issued a check to Pablo in the amount of P69,000.00. Without any authority from Danny, Pablo (the
payee) changed the amount of P69,000.00 to P77,000.00.
Pablo indorsed the check to Indong. Later, Indong indorsed it to Harry.
Subsequently, Harry presented the check for payment by PNBank (the drawee bank. The bank dishonored it.

QUESTIONS:
1) If Harry will give NOD to Danny, is the latter liable to pay P77,000.00?
Ans: NO. Danny is not liable to pay the P77K bec. as far as he is concern the instrument is AVOIDED. He did not
authorize or assent to the alteration.

2) Will there be a difference in your answer if Harry is a HDC?


Ans: NONE, bec. material alteration is real defense.

3) If Harry gives NOD to Pablo, is the latter liable to pay P77K?


Ans: YES. Pablo is liable bec. he is the one who made the material alteration and he was not authorized by Danny to
make the material alteration.

Primary reason: Pablo is liable to pay P77K bec. the law provides that the instrument can be enforced against the party
who made the alteration. The general rule is that the instrument is avoided except to the one who made or is not
authorized to make the alteration. Here, Pablo falls under the exception.

Pablo as an indorser warrants to all subsequent holders that the instrument is genuine and in all respects what it
purports to be.

4) What if Harry gives NOD to Indong, is the latter liable to pay P77K?
Ans: YES. Indong is liable to pay P77K bec. under the law a subsequent indorser is liable in material alteration.

YES. Indong is liable to pay P77K. As a subsequent indorser, Indong is liable bec. he warrants that the instrument is
genuine and in all respects what it purports to be.

5) Assuming that Indong and Pablo are not in the country and Harry badly needs money and wants to recover from the
drawer, can Harry as HDC recover the amount other than P77K from Danny?
Ans: YES. As HDC Harry can recover the amount of P69K ONLY from Danny bec. the HDC can enforce the instrument
according to its original tenor.

Banco Atlantico vs Auditor General, 81 scra 335


- 3 checks involved; 1 check payment for a living quarter; a check is payable in the amount of US$79 for one living
quarter; the US$79 became US$375,000 (alteration in the amount); Azucena Pace deposited the check after altering it.

Face
US$79.00 (to US$39,000.00)

Pay to the order of Azucena Pace.

(Sgd) Luis
Gonzalez (Ambassador)

To: PNBank
this was altered.

Back
To: Banco Atlantico de Espanyol
(Sgd) Azucena
Pace
Banco Atlantico presented this for payment by the PNB (before this BA allowed AP to withdraw the amount even without
clearing.

PNB was informed that the checks were altered.

BA sued PNB, impleading AG

BA should have waited for the clearing.


In Internationa banking practice, the collecting bank should wait for the clearing of the check, esp. if the check
involves large amount.

SC: BA cannot recover bec.since the 3 checks were fraudulently altered they are rendered wholly inoperative. (acc. to
AD wholly inoperative is for forgery, so this is a wrong reasoning)

Sec. 29 ACCOMMODATION PARTY

He becomes a party to the instrument without receiving a valuable consideration therefore.


He may be a accommodation maker/drawer/indorser/acceptor.
He lends his name or credit to another. He does not receive anything for becoming a party to the instrument.
He may receive payment for lending his name.
Eg. One borrowed money from you but you have none, instead you drew a check in his favor.

Accommodation indorser

Accommodation acceptor eg. A bank who pays your payee even if you do not have any deposit in the bank but you have
a good credit. Reason: bank did not receive any valuable consideration.

One remains an AP even if he receives payment bec. of the good name he lends.
What matters is he received nothing for being a drawer.
lending name or good credit
NB: An accommodation party is liable to a HOLDER FOR VALUE (HFV)

Illustration:
Without receiving valuable consideration from Nena, the drawer Pedro issued a check to the former. Nena
indorsed this check to Clara for payment of services rendered by Clara (HFV) to Nena. The amount of the check is
P10,000.00.
Clara presented the check for payment by the drawee bank but was dishonored. As consequence, Clara gave
NOD to Pedro and another notice to Nena.

QUESTIONS:
1) Can Clara require Pedro to pay P10,000.00?
Ans: YES. Pedro is liable to a HFV.

2) Suppose Nena paid P3.00 to Pedro for the latters good credit which he lent to the former, will your answer be the same
as in the answer in question number 1?
Ans: YES. See: 29 - notwithstanding such holder at a time of taking the instrument knew him to be an accommodation
party.

Sec. 28 WANT OF CONSIDERATION

1. Want of consideration
2. Failure of consideration
3. Partial failure of consideration
***all of them are PERSONAL DEFENSES

Want of consideration
- the parties did not contemplate of intend a value or valuable consideration for the issuance or indorsement of the
instrument.

Failure of consideration
- If the parties agreed on a consideration for the issuance or indorsement of instrument but that, which was stipulated, did
not materialize then this is called failure of consideration.

Partial failure of consideration


- If parties agreed on a particular consideration or specific amount but ONLY part of it was satisfied or delivered then this
is called partial failure of consideration (this is a defense PRO TANTO or reduced or mitigated liability)

Illustration:
Juana was a drawer of a check containing the amount of P100,000.00 which is made payable to the order of
Jose. Juana issued this check to Kose with the understanding that Jose will deliver 10 carabaos to Juana. Jose indorsed
the check to Harry who is a HDC.
The drawee bank PNB did not pay the check upon presentment by Harry.
QUESTIONS: (assume that in Q1 and Q2 no carabao was delivered)
1) Can Harry require Juana to pay P100,000.00?
Ans: YES. Failure of consideration is a personal defense and so that is not available to Juana against a HDC.

2) Suppose Harry is not a HDC, is Juana liable to pay?


Ans: NO. Juana is not liable bec. failure of consideration is a personal defense which she may avail against one who is
not a HDC.

3) Suppose only 3 carabaos equivalent to P30K were delivered by Jose to Juana, can Harry who is not a HDC require
Juana to pay P100,000.00?
Ans: NO. Juana has a defense PRO TANTO against the holder who is not a HDC.

How much could Juana be made liable?


She is liable as much as P30K bec. she has a defense pro tanto (reduced liability).

Sec. 60

Illustration:
Amado issued a promissory note payable to the order of Rey P20K. Rey indorsed this to Ronnie. Ronnie
presented this note for payment by Amado. Amado refused to pay bec. he contends that Rey is insane an so he could not
incur liability.
Is the contention of Amado tenable or not?
NOT tenable.
See: 60. The maker by making the instrument engages to pay according to its original tenor. The maker
ADMITS the existence of the payee and his then capacity to indorse.
Amado has admitted that Rey has the capacity to indorse. He is already precluded form contending the legal
capacity of the payee.