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SEC. 1. FORM OF NEGOTIABLE INSTRUMENTS. - AN INSTRUMENT TO BE NEGOTIABLE MUST Ø Explanation: Suppose A is 17 years old, the promissory note is still negotiable because it
CONFORM TO THE FOLLOWING REQUIREMENTS: has all the requisites of negotiability.
o However, B cannot collect from A on maturity because the contract between
(A) IT MUST BE IN WRITING AND SIGNED BY THE MAKER OR DRAWER; them is voidable, A being a minor.
(B) MUST CONTAIN AN UNCONDITIONAL PROMISE OR ORDER TO PAY A SUM CERTAIN IN o B can negotiate to C for value, and such would be valid. However, C cannot
MONEY; collect from A on maturity because A has the real defense of minority.
(C) MUST BE PAYABLE ON DEMAND, OR AT A FIXED OR DETERMINABLE FUTURE TIME; § C can collect from B, after complying with certain formalities (ie.,
(D) MUST BE PAYABLE TO ORDER OR TO BEARER; AND notice of dishonor, etc.)
(E) WHERE THE INSTRUMENT IS ADDRESSED TO A DRAWEE, HE MUST BE NAMED OR
OTHERWISE INDICATED THEREIN WITH REASONABLE CERTAINTY.
Requisite Notes
(1) It must be in writing Ø The law merely requires that it must be in writing.
Ø Requisites of negotiable instruments: WUPOA and signed by the o There is no particular form or type of writing
maker or drawer; required – it may be typewritten, printed or
Negotiable Instrument Promissory Note Bill of Exchange handwritten.
o Likewise, no particular writing material is
(1) It must be in writing and (1) It must be in writing and (1) It must be in writing and
required – it may be written on a bond paper, pad
signed by the maker or signed by the maker; signed by the drawer;
paper, tissue paper, parchment, or any other
drawer;
writing material.
(2) Must contain an (2) Must contain an
Ø The signature may be in any form, but preferably in his
(2) Must contain an unconditional promise to unconditional order to pay a
regularly accepted signature. What is important is the intent
unconditional promise or pay a sum certain in money; sum certain in money;
to be bound by such signature.
order to pay a sum certain
o Hence, if the maker or drawer is an illiterate, his
in money; (3) Must be payable on (3) Must be payable on
signature may be by mark, such as a thumb mark.
demand, or at a fixed or demand, or at a fixed or
(3) Must be payable on determinable future time; determinable future time; (2) Must contain an Ø If the payment is subject to the happening of a contingency
demand, or at a fixed or unconditional promise or the fulfillment of a condition, the instrument becomes
determinable future time; (4) Must be payable to (4) Must be payable to or order to pay a sum non-negotiable.
bearer; order; and certain in money; o Ex. “Pay to the order of B P5,000.00 if he passes
(4) Must be payable to the CPA Board this coming November, 1995.”
order or to bearer; and (5) Where the instrument is (invalid promise to pay)
addressed to a drawee, he Ø In a promissory note, a mere acknowledgment of a debt
(5) Where the instrument is must be named or otherwise does not constitute a promise. There must be an indication
addressed to a drawee, he indicated therein with as to when the debt will be paid.
must be named or otherwise reasonable certainty. o Ex. “I.O.U. P500.00.” (invalid promise to pay)
indicated therein with Ø In a bill of exchange, there must be a definite order to pay.
reasonable certainty. A request, supplication, or a plea to pay will not be valid.
Ø Sum certain in money – means that the amount must be
Ø Negotiability does not equate to validity. It is a mere matter of form. fixed, definite or liquidated.
o Hence, as long as the instrument conforms to the aforementioned requisites, it is o It is important that the amount must be clearly
negotiable even though it may be void, voidable, unenforceable or uncollectible. stated so that when it is paid on maturity, it will
Ø If an instrument is negotiable, then the provisions of the Negotiable Instruments Law are discharge the instrument.
applicable. Otherwise, the general provisions on Contracts will determine the rights and Ø It must be in money or legal tender only.
liabilities of the parties.
(2) Statement of the Ø Such statement merely explains the nature of the transaction
transaction. which gave rise to the instrument and does not affect its
negotiability.
BUT NOTHING IN THIS SECTION SHALL VALIDATE ANY PROVISION OR STIPULATION OTHERWISE
ILLEGAL.
(A) IT IS NOT DATED; OR
(B) DOES NOT SPECIFY THE VALUE GIVEN, OR THAT ANY VALUE HAD BEEN GIVEN THEREFOR;
OR
Sum Certain In Money; General Rule (C) DOES NOT SPECIFY THE PLACE WHERE IT IS DRAWN OR THE PLACE WHERE IT IS PAYABLE;
OR
The party primarily liable shall be required to pay the negotiable instrument in a “sum (D) BEARS A SEAL; OR
certain in money” only. (E) DESIGNATES A PARTICULAR KIND OF CURRENT MONEY IN WHICH PAYMENT IS TO BE MADE.
Exceptions;
Notes BUT NOTHING IN THIS SECTION SHALL ALTER OR REPEAL ANY STATUTE REQUIRING IN CERTAIN
Provisions which -
CASES THE NATURE OF THE CONSIDERATION TO BE STATED IN THE INSTRUMENT.
(1) Authorize the sale Example
of collateral securities
in case the instrument I promise to pay B or order P500.00 on December 31, Omissions; Seal;
be not paid at maturity. 1995, and in case I am unable to pay, he may sell the
Notes
Particular Money
diamond ring which I pledged to him as collateral, and
the proceeds thereof to be applied to the payment of this (1) It is not dated. Ø The date of the instrument is important:
note. 1. To determine the maturity date of the instrument
(Sgd.) A if it is payable at a fixed period after date; or
2. To determine when the interest, if provided in the
(2) Authorize a Example instrument, will start to run.
confession of judgment
(2) Does not specify the Ø Usually “For Value Received.”
if the instrument be not I promise to pay B or order P500.00 on December 31, value given, or that any Ø Omission of these words does not render the instrument
paid at maturity. 1995, and in case I am unable to pay, I authorize any
value had been given non-negotiable because it is presumed that the contract
attorney or a competent court to declare confession of
judgment against me for the same amount of this note, therefor. between the maker or drawer and the payee is for a
including interests, costs and attorney’s fees. consideration.
(Sgd.) A o In absence of consideration, the contract is null
and void.
(3) Waive the benefit of Ø Voluntary waiver, by the maker or drawer, of any legal (3) Does not specify the Ø The law presumes that payment shall be made at the
any law intended for requirements intended for the benefit of the debtor or place where it is drawn domicile of the maker.
the advantage or obligor will be valid. or the place where it is
protection of the Example payable.
obligor.
(4) Bears a seal. Ø Sec. 1 of the NIL does not require a seal to make an
I promise to pay B or order P500.00 on December 31,
1995. Notice of Dishonor is hereby waived. instrument negotiable.
(Sgd.) A Ø It may or may not be used – it is usually used in an
instrument as a sign of authenticity.
(2) In which no time for Example (1) A payee who is not Example
payment is expressed. maker, drawer, or
drawee. I promise to pay to the order of Krystoffer Yap the sum of
I promise to pay B or order P500.00.
(Sgd.) A Five Hundred Pesos (P500.00).
(Sgd.) Patrick Balisong
Example
Ø The holder of an undated promissory note which is payable at a fixed period after date, has Manila, _________
the right to insert the correct date of issue which shall be the basis for the computation of
the actual date of maturity. I promise to pay to the order of B the sum of ________ 30
Ø Effects of wrong insertion of date: days after date.
o If the holder fraudulently inserts the wrong date of issue in the undated (Sgd.) A
instrument, the instrument is:
1. Void as to him; and Ø Explanation: A issued it to B on March 1, 1995, with specific instructions that B will fill
2. Prior indorsers are discharged. up the amount only up to P1,000.00. On receipt, B inserted the correct date of March 1,
3. Valid as to a holder in due course to whom the instrument may be 1995 and the amount of P10,000.00 instead. B then indorsed it to C, C to D, D to E, who
negotiated. is not a HDC.
o B correctly inserted the date of the instrument.
SEC. 14. BLANKS; WHEN MAY BE FILLED. - WHERE THE INSTRUMENT IS WANTING IN ANY o The maturity of the instrument will be March 31, 1995 because 30 days will be
MATERIAL PARTICULAR, THE PERSON IN POSSESSION THEREOF HAS A PRIMA FACIE AUTHORITY counted from the date of issue.
TO COMPLETE IT BY FILLING UP THE BLANKS THEREIN. AND A SIGNATURE ON A BLANK PAPER o On maturity, E cannot collect from A because all parties prior to the fraudulent
DELIVERED BY THE PERSON MAKING THE SIGNATURE IN ORDER THAT THE PAPER MAY BE insertion will not be liable to a holder not in due course. E can, however, collect
CONVERTED INTO A NEGOTIABLE INSTRUMENT OPERATES AS A PRIMA FACIE AUTHORITY TO P10,000.00 from B (made the fraudulent insertion), C, or D (parties secondarily
FILL IT UP AS SUCH FOR ANY AMOUNT. IN ORDER, HOWEVER, THAT ANY SUCH INSTRUMENT liable subsequent to B).
WHEN COMPLETED MAY BE ENFORCED AGAINST ANY PERSON WHO BECAME A PARTY THERETO o If E is a HDC, he can collect P10,000.00 from A because the rule says that
PRIOR TO ITS COMPLETION, IT MUST BE FILLED UP STRICTLY IN ACCORDANCE WITH THE whatever date and amount appear on the instrument at the time of indorsement
AUTHORITY GIVEN AND WITHIN A REASONABLE TIME. BUT IF ANY SUCH INSTRUMENT, AFTER will be valid as to a HDC.
COMPLETION, IS NEGOTIATED TO A HOLDER IN DUE COURSE, IT IS VALID AND EFFECTUAL FOR
ALL PURPOSES IN HIS HANDS, AND HE MAY ENFORCE IT AS IF IT HAD BEEN FILLED UP STRICTLY
IN ACCORDANCE WITH THE AUTHORITY GIVEN AND WITHIN A REASONABLE TIME.
Ø Delivery – the transfer of possession of the instrument, whether actual or constructive, from
one person to another, with the intent to transfer title to the instrument. Rules on Construction Notes
Ø Before delivery, the instrument is inoperative and revocable.
(1) Where the sum payable is Ø Discrepancy in the sum payable as expressed in
Sec. 14 Sec. 15 Sec. 16 expressed in words and also in words and figures, shall be:
Complete X X ✓ figures and there is a 1. Construed in favor of the written amount
discrepancy between the two, in words.
Delivered ✓ X X
the sum denoted by the words is 2. If the words are ambiguous or uncertain,
The rule presumes that The maker or drawer If the instrument is the sum payable; but if the reference may be had to the figures to fix
the maker or drawer and all parties prior to taken from the maker words are ambiguous or the amount.
gave the authority to the unauthorized without his knowledge uncertain, reference may be had
fill up the incomplete completion and and consent, and to the figures to fix the amount.
instrument with negotiation of the subsequently
correct date and incomplete and negotiated to a HV, (2) Where the instrument Ø Computation of the interest shall be:
amount. undelivered the maker will not be provides for the payment of 1. From the date specified in the
Effect interest, without specifying the instrument;
instrument will not be liable – “want of
If the instrument is liable to all holders, delivery.” date from which interest is to 2. In the absence of specific date, interest
subsequently filled up including HDC. run, the interest runs from the shall run from the date of the instrument;
with the unauthorized However, this does date of the instrument, and if the 3. If the instrument is undated, interest shall
date and amount, the not apply to HDC instrument is undated, from the be computed from the date of issue of the
PPL and all parties because a valid issuance thereof. instrument;
prior to the wrongful delivery thereof by all 4. At the rate stipulated in the instrument;
SEC. 22. EFFECT OF INDORSEMENT BY INFANT OR CORPORATION. - THE INDORSEMENT OR Ø Consideration – the essential or proximate purpose which the parties had in mind when
ASSIGNMENT OF THE INSTRUMENT BY A CORPORATION OR BY AN INFANT PASSES THE
they entered into the transaction.
PROPERTY THEREIN, NOTWITHSTANDING THAT FROM WANT OF CAPACITY, THE CORPORATION
o An essential element of a contract, without which the contract is rendered void.
OR INFANT MAY INCUR NO LIABILITY THEREON.
Ø For negotiable instruments, there is presumed to be an existing valuable consideration
between them to make the instrument valid.
o Such presumption is disputable/rebuttable.
Ø Infant herein refers to a minor who is incapacitated to enter into a contract. o The burden of proof is on the party asserting the absence or failure of
o The minor can pass valid title to the indorsee, but he cannot be held liable on the consideration.
instrument as he can interpose a real defense of minority.
Ø This provision likewise applies to an insane, demented, or other incapacitated person. Example
I promise to pay to the order of B P5,000.00 on June 30,
SEC. 23. FORGED SIGNATURE; EFFECT OF. - WHEN A SIGNATURE IS FORGED OR MADE 1995.
WITHOUT THE AUTHORITY OF THE PERSON WHOSE SIGNATURE IT PURPORTS TO BE, IT IS (Sgd.) A
WHOLLY INOPERATIVE, AND NO RIGHT TO RETAIN THE INSTRUMENT, OR TO GIVE A DISCHARGE
THEREFOR, OR TO ENFORCE PAYMENT THEREOF AGAINST ANY PARTY THERETO, CAN BE Ø Explanation: The presumption is that A received from B a valuable consideration at least
ACQUIRED THROUGH OR UNDER SUCH SIGNATURE, UNLESS THE PARTY AGAINST WHOM IT IS equivalent to the amount of P5,000.00 which he promises to pay for.
SOUGHT TO ENFORCE SUCH RIGHT IS PRECLUDED FROM SETTING UP THE FORGERY OR WANT OF o Likewise, if B indorses it to C, a second contract is entered into between B and
AUTHORITY. C and it is presumed that B received valuable consideration from C in exchange
for the indorsement.
Ø Forgery – the counterfeit (made to look like an exact copy) making or fraudulent alteration
of any writing. SEC. 25. VALUE, WHAT CONSTITUTES. — VALUE IS ANY CONSIDERATION SUFFICIENT TO
o This section covers only forgery of the signature of the parties to the instrument. SUPPORT A SIMPLE CONTRACT. AN ANTECEDENT OR PRE-EXISTING DEBT CONSTITUTES VALUE;
Fraudulent alteration in the amount, etc. of the instrument is covered by (Sec. AND IS DEEMED SUCH WHETHER THE INSTRUMENT IS PAYABLE ON DEMAND OR AT A FUTURE
124). TIME.
Ø Note the ONLY the forged signature is wholly inoperative, not the instrument itself.
Ø The following persons concerned cannot be held liable under the following circumstances:
Ø Valuable consideration – some right, interest, profit or benefit accruing to a party who
1. If a person’s signature is forged as MAKER of a promissory note, he cannot be
makes the contract, such as the maker or drawer. It may likewise be some forbearance,
held liable because he never made the promise to pay.
detriment, loss, labor or service given, suffered or undertaken by the other party, such as
2. If a person’s signature is forged as DRAWER of a check, the drawee bank cannot
the payee.
charge the amount thereof against the drawer’s account because he never gave
Ø Consideration not capable of pecuniary estimation are not considered valuable
the bank the order to pay.
consideration, such as:
3. If a person’s signature is forged as PAYEE or INDORSEE, parties after the
1. Love and affection;
forged indorsement cannot acquire any right against any party whose name
2. Mere moral obligations;
appears prior to the forgery.
3. Gratitude;
4. Service rendered out of kindness, without expectation of reward; or
5. Etc.
SEC. 26. WHAT CONSTITUTES HOLDER FOR VALUE. - WHERE VALUE HAS AT ANY TIME BEEN
GIVEN FOR THE INSTRUMENT, THE HOLDER IS DEEMED A HOLDER FOR VALUE IN RESPECT TO
ALL PARTIES WHO BECOME SUCH PRIOR TO THAT TIME.
Example SEC. 29. LIABILITY OF ACCOMMODATION PARTY. - AN ACCOMMODATION PARTY IS ONE WHO
I promise to pay to the order of B P5,000.00 on June 30, HAS SIGNED THE INSTRUMENT AS MAKER, DRAWER, ACCEPTOR, OR INDORSER, WITHOUT
1995. RECEIVING VALUE THEREFOR, AND FOR THE PURPOSE OF LENDING HIS NAME TO SOME OTHER
(Sgd.) A PERSON. SUCH A PERSON IS LIABLE ON THE INSTRUMENT TO A HOLDER FOR VALUE,
NOTWITHSTANDING SUCH HOLDER, AT THE TIME OF TAKING THE INSTRUMENT, KNEW HIM TO
Ø Explanation: A executes the PN favor of B. B then borrowed P3,000.00 from C, and as BE ONLY AN ACCOMMODATION PARTY.
collateral for the loan, B indorsed the PN to C – “Pay to C for P3,000.00 only.”
o The indorsement is invalid because the rule says that all indorsements must be
Ø Accommodation instrument – made for the purpose of enabling the payee to obtain credit,
full indorsements – the full amount payable in the instrument must be indorsed
and as such, it has no validity until it passes into the hands of a holder for value.
so as to avoid multiplicity of suits.
Ø Accommodation party – signs the instrument as maker, drawer, acceptor, or indorser,
o “Pay to C for P5,000.00” – C now becomes a HV to the extent of his lien of
without receiving value therefor, for the purpose of “lending his name and credit” to some
P3,000.00 because B indorsed the PN to C as security for the loan. B gets the
other person.
P2,000.00.
o Requisites of an accommodation party:
o If there is no consideration between A and B, C can collect from A if A has no
1. Signs the instrument as maker, drawer, acceptor, or indorser;
other defense against B, but C can only collect P3,000.00 – the amount of his
2. Does not receive any part of the consideration;
lien.
3. Merely lending his name and credit to another person known as the
accommodated party; and
SEC. 28. EFFECT OF WANT OF CONSIDERATION. - ABSENCE OR FAILURE OF CONSIDERATION IS 4. Becomes liable solidarily as surety, and can be held directly liable by
A MATTER OF DEFENSE AS AGAINST ANY PERSON NOT A HOLDER IN DUE COURSE; AND PARTIAL the holder of the instrument.
FAILURE OF CONSIDERATION IS A DEFENSE PRO TANTO, WHETHER THE FAILURE IS AN Ø Since the accommodation party acts as a surety, he shall be held solidarily liable on the
ASCERTAINED AND LIQUIDATED AMOUNT OR OTHERWISE. instrument although the holder thereof knows that he is only an accommodation party.
o A person who signs as an accommodation maker or drawer becomes a PPL to
the instrument.
Defense of Ø Effects of payment of the instrument –
Notes
Consideration o By an accommodated party:
(1) Absence or lack of Ø This situation occurs when there is a total lack of 1. Payment in due course by the accommodated party discharges the
consideration. consideration, or when such consideration is not valid. instrument; and
Ø Ex. A issued a PN to B for payment of stock certificates 2. Accommodated party is discharged.
which turned out to be fake. o By an accommodation party:
o B cannot collect from A – the latter has a personal 1. Accommodation party has the right to recover from the accommodated
defense of absence of consideration. party.
o If B indorses to C – C can collect if he is a HDC 2. If the accommodated party gives the instrument as a security to a
because A’s defense is personal. holder who knows of the accommodation, the accommodation party
has the right to receive the security from the holder and keep it until
the accommodated party reimburses him.
SEC. 31. INDORSEMENT; HOW MADE. - THE INDORSEMENT MUST BE WRITTEN ON THE
INSTRUMENT ITSELF OR UPON A PAPER ATTACHED THERETO. THE SIGNATURE OF THE
INDORSER, WITHOUT ADDITIONAL WORDS, IS A SUFFICIENT INDORSEMENT.
Ø Indorsement – a legal transaction between the indorser and the indorsee effected by writing
the indorser’s signature at the back of the instrument or in a separate paper by which he:
1. Transfers title of the instrument to the indorsee; and
2. Enters into an implied guaranty that the note will be paid.
Ø Negotiation of the instrument starts from the indorsement by the payee to the first indorsee.
Ø Indorsement may be written on any part of the instrument provided there is the intention to
make the signature an indorsement.
SEC. 35. BLANK INDORSEMENT; HOW CHANGED TO SPECIAL INDORSEMENT. - THE HOLDER
MAY CONVERT A BLANK INDORSEMENT INTO A SPECIAL INDORSEMENT BY WRITING OVER THE
SIGNATURE OF THE INDORSER IN BLANK ANY CONTRACT CONSISTENT WITH THE CHARACTER
OF THE INDORSEMENT.
(A) TO RECEIVE PAYMENT OF THE INSTRUMENT; SEC. 39. CONDITIONAL INDORSEMENT. - WHERE AN INDORSEMENT IS CONDITIONAL, THE
(B) TO BRING ANY ACTION THEREON THAT THE INDORSER COULD BRING; PARTY REQUIRED TO PAY THE INSTRUMENT MAY DISREGARD THE CONDITION AND MAKE
(C) TO TRANSFER HIS RIGHTS AS SUCH INDORSEE, WHERE THE FORM OF THE PAYMENT TO THE INDORSEE OR HIS TRANSFEREE WHETHER THE CONDITION HAS BEEN
INDORSEMENT AUTHORIZES HIM TO DO SO. FULFILLED OR NOT. BUT ANY PERSON TO WHOM AN INSTRUMENT SO INDORSED IS NEGOTIATED
WILL HOLD THE SAME, OR THE PROCEEDS THEREOF, SUBJECT TO THE RIGHTS OF THE PERSON
BUT ALL SUBSEQUENT INDORSEES ACQUIRE ONLY THE TITLE OF THE FIRST INDORSEE UNDER INDORSING CONDITIONALLY.
THE RESTRICTIVE INDORSEMENT.
Ø Explanation: Suppose B negotiates to C by special indorsement. C negotiates to D by mere SEC. 44. INDORSEMENT IN REPRESENTATIVE CAPACITY. - WHERE ANY PERSON IS UNDER
delivery. OBLIGATION TO INDORSE IN A REPRESENTATIVE CAPACITY, HE MAY INDORSE IN SUCH TERMS
o The note remains payable to bearer. AS TO NEGATIVE PERSONAL LIABILITY.
o In case D elects to present the note for payment to A on maturity and A dishonors
it, D can collect only from C, from whom he “derived his title.”
Example
o D cannot collect from B because he did not get his title from B. B will only be
liable to C who derived his title from the indorsement of B. I promise to pay to the order of B P10,000.00
(Sgd.) A
2. Order instrument
SEC. 49. TRANSFER WITHOUT INDORSEMENT; EFFECT OF. - WHERE THE HOLDER OF AN
INSTRUMENT PAYABLE TO HIS ORDER TRANSFERS IT FOR VALUE WITHOUT INDORSING IT, THE
TRANSFER VESTS IN THE TRANSFEREE SUCH TITLE AS THE TRANSFEROR HAD THEREIN, AND
THE TRANSFEREE ACQUIRES IN ADDITION, THE RIGHT TO HAVE THE INDORSEMENT OF THE
TRANSFEROR. BUT FOR THE PURPOSE OF DETERMINING WHETHER THE TRANSFEREE IS A
HOLDER IN DUE COURSE, THE NEGOTIATION TAKES EFFECT AS OF THE TIME WHEN THE
INDORSEMENT IS ACTUALLY MADE.
SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE. - A HOLDER IN DUE COURSE IS A SEC. 53. WHEN PERSON NOT DEEMED HOLDER IN DUE COURSE. - WHERE AN INSTRUMENT
PAYABLE ON DEMAND IS NEGOTIATED ON AN UNREASONABLE LENGTH OF TIME AFTER ITS
HOLDER WHO HAS TAKEN THE INSTRUMENT UNDER THE FOLLOWING CONDITIONS:
ISSUE, THE HOLDER IS NOT DEEMED A HOLDER IN DUE COURSE.
Holder in Due Course Notes SEC. 54. NOTICE BEFORE FULL AMOUNT IS PAID. - WHERE THE TRANSFEREE RECEIVES NOTICE
OF ANY INFIRMITY IN THE INSTRUMENT OR DEFECT IN THE TITLE OF THE PERSON NEGOTIATING
(1) Complete and regular Ø An instrument is not complete upon its face if: THE SAME BEFORE HE HAS PAID THE FULL AMOUNT AGREED TO BE PAID THEREFOR, HE WILL BE
upon its face. 1. The instrument contains blanks as to some DEEMED A HOLDER IN DUE COURSE ONLY TO THE EXTENT OF THE AMOUNT THEREFORE PAID
material terms; or BY HIM.
2. Material alterations clearly evident on the face
of the instrument render it irregular, and the
holder is not HDC. Ø This is a situation where a person takes the instrument under circumstances which would
make him a HDC and makes a partial payment for the negotiation of the instrument to him.
(2) Received before it Ø When overdue: But before he makes full payment, he learns of the defect in the title of the person who
was overdue, and 1. When payable at a fixed date – after such fixed negotiated to him.
without notice that it had date. o Hence, the indorsee or holder becomes a HDC only to the extent of what he has
been previously 2. As to instrument payable on installment, a paid prior to his knowledge of the defect.
dishonored if such was person who takes the instrument with notice that
the fact. the first installment has not been paid, is not a
HDC. SEC. 55. WHEN TITLE DEFECTIVE. - THE TITLE OF A PERSON WHO NEGOTIATES AN
3. If the instrument is payable on or before a certain INSTRUMENT IS DEFECTIVE WITHIN THE MEANING OF THIS ACT WHEN HE OBTAINED THE
date – it is overdue after such date. However, if INSTRUMENT, OR ANY SIGNATURE THERETO, BY FRAUD, DURESS, OR FORCE AND FEAR, OR
the person taking the instrument knows that the OTHER UNLAWFUL MEANS, OR FOR AN ILLEGAL CONSIDERATION, OR WHEN HE NEGOTIATES IT
PPL has dishonored the instrument before IN BREACH OF FAITH, OR UNDER SUCH CIRCUMSTANCES AS AMOUNT TO A FRAUD.
maturity date, then the party taking the
instrument is not a HDC.
SEC. 57. RIGHTS OF HOLDER IN DUE COURSE. - A HOLDER IN DUE COURSE HOLDS THE
INSTRUMENT FREE FROM ANY DEFECT OF TITLE OF PRIOR PARTIES, AND FREE FROM DEFENSES
AVAILABLE TO PRIOR PARTIES AMONG THEMSELVES, AND MAY ENFORCE PAYMENT OF THE
INSTRUMENT FOR THE FULL AMOUNT THEREOF AGAINST ALL PARTIES LIABLE THEREON.
Ø Rights of HDC:
1. Sue on the instrument in his own name;
2. Receive payment;
3. Hold the instrument free from (personal) defenses available to prior parties
among themselves; and
4. Enforce payment for the full amount of the instrument against all parties liable
thereon.
SEC. 58. WHEN SUBJECT TO ORIGINAL DEFENSE. - IN THE HANDS OF ANY HOLDER OTHER THAN
A HOLDER IN DUE COURSE, A NEGOTIABLE INSTRUMENT IS SUBJECT TO THE SAME DEFENSES AS
IF IT WERE NON-NEGOTIABLE. BUT A HOLDER WHO DERIVES HIS TITLE THROUGH A HOLDER IN
DUE COURSE, AND WHO IS NOT HIMSELF A PARTY TO ANY FRAUD OR ILLEGALITY AFFECTING
THE INSTRUMENT, HAS ALL THE RIGHTS OF SUCH FORMER HOLDER IN RESPECT OF ALL PARTIES
PRIOR TO THE LATTER.
Ø Any defense, real or personal, which is available to an obligor of a simple contract, either
against the obligee or creditor or against the assignee of the obligee, will also be available
to the parties on a negotiable instrument against holders who are not HDC’s.
Ø This is called the “Shelter Rule/Doctrine” – because the holder who derives title through
the HDC takes “shelter” in the rights available to the latter.
o Requisites:
1. Derives title through a HDC; and
2. Not a party to any fraud or illegality affecting the instrument.
20 YAP, K. | ATENEO LAW
V. LIABILITIES OF PARTIES SEC. 65. WARRANTY WHERE NEGOTIATION BY DELIVERY AND SO FORTH. — EVERY PERSON
NEGOTIATING AN INSTRUMENT BY DELIVERY OR BY A QUALIFIED INDORSEMENT WARRANTS:
(COMPILED ENUMERATION OF WARRANTIES ON NEXT PAGE)
(A) THAT THE INSTRUMENT IS GENUINE AND IN ALL RESPECTS WHAT IT PURPORTS TO BE;
SEC. 60. LIABILITY OF MAKER. - THE MAKER OF A NEGOTIABLE INSTRUMENT, BY MAKING IT, (B) THAT HE HAS A GOOD TITLE TO IT;
ENGAGES THAT HE WILL PAY IT ACCORDING TO ITS TENOR, AND ADMITS THE EXISTENCE OF (C) THAT ALL PRIOR PARTIES HAD CAPACITY TO CONTRACT;
THE PAYEE AND HIS THEN CAPACITY TO INDORSE. (D) THAT HE HAS NO KNOWLEDGE OF ANY FACT WHICH WOULD IMPAIR THE
VALIDITY OF THE INSTRUMENT OR RENDER IT VALUELESS.
SEC. 61. LIABILITY OF DRAWER. - THE DRAWER BY DRAWING THE INSTRUMENT ADMITS THE BUT WHEN THE NEGOTIATION IS BY DELIVERY ONLY, THE WARRANTY EXTENDS IN FAVOR OF
EXISTENCE OF THE PAYEE AND HIS THEN CAPACITY TO INDORSE; AND ENGAGES THAT, ON DUE NO HOLDER OTHER THAN THE IMMEDIATE TRANSFEREE.
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 THE PROVISIONS OF SUBDIVISION (C) OF THIS SECTION DO NOT APPLY TO A PERSON
DULY TAKEN, HE WILL PAY THE AMOUNT THEREOF TO THE HOLDER OR TO ANY SUBSEQUENT NEGOTIATING PUBLIC OR CORPORATION SECURITIES OTHER THAN BILLS AND NOTES.
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. SEC. 66. LIABILITY OF GENERAL INDORSER. - EVERY INDORSER WHO INDORSES WITHOUT
QUALIFICATION, WARRANTS TO ALL SUBSEQUENT HOLDERS IN DUE COURSE:
SEC. 62. LIABILITY OF ACCEPTOR. - THE ACCEPTOR, BY ACCEPTING THE INSTRUMENT, (A) THE MATTERS AND THINGS MENTIONED IN SUBDIVISIONS (A), (B), AND (C) OF THE NEXT
ENGAGES THAT HE WILL PAY IT ACCORDING TO THE TENOR OF HIS ACCEPTANCE AND ADMITS: PRECEDING SECTION; AND
(B) THAT THE INSTRUMENT IS, AT THE TIME OF HIS INDORSEMENT, VALID AND
(A) THE EXISTENCE OF THE DRAWER, THE GENUINENESS OF HIS SIGNATURE, AND HIS SUBSISTING;
CAPACITY AND AUTHORITY TO DRAW THE INSTRUMENT; AND
(B) THE EXISTENCE OF THE PAYEE AND HIS THEN CAPACITY TO INDORSE. AND, IN ADDITION, HE ENGAGES THAT, ON DUE PRESENTMENT, IT SHALL BE ACCEPTED OR
PAID, OR BOTH, AS THE CASE MAY BE, ACCORDING TO ITS TENOR, AND THAT IF IT BE
DISHONORED AND THE NECESSARY PROCEEDINGS ON DISHONOR BE DULY TAKEN, HE WILL PAY
SEC. 63. WHEN A PERSON DEEMED INDORSER. - A PERSON PLACING HIS SIGNATURE UPON AN THE AMOUNT THEREOF TO THE HOLDER, OR TO ANY SUBSEQUENT INDORSER WHO MAY BE
INSTRUMENT OTHERWISE THAN AS MAKER, DRAWER, OR ACCEPTOR, IS DEEMED TO BE COMPELLED TO PAY IT.
INDORSER UNLESS HE CLEARLY INDICATES BY APPROPRIATE WORDS HIS INTENTION TO BE
BOUND IN SOME OTHER CAPACITY.
SEC. 67. LIABILITY OF INDORSER WHERE PAPER NEGOTIABLE BY DELIVERY. — WHERE A
PERSON PLACES HIS INDORSEMENT ON AN INSTRUMENT NEGOTIABLE BY DELIVERY, HE INCURS
Ø When a person wants to be party to an instrument, he must clearly indicate in what capacity
ALL THE LIABILITY OF AN INDORSER.
he intends to be bound by his signature. Otherwise, he will be considered an indorser.
SEC. 64. LIABILITY OF IRREGULAR INDORSER. - WHERE A PERSON, NOT OTHERWISE A PARTY SEC. 68. ORDER IN WHICH INDORSERS ARE LIABLE. - AS RESPECT ONE ANOTHER, INDORSERS
TO AN INSTRUMENT, PLACES THEREON HIS SIGNATURE IN BLANK BEFORE DELIVERY, HE IS ARE LIABLE PRIMA FACIE IN THE ORDER IN WHICH THEY INDORSE; BUT EVIDENCE IS
LIABLE AS INDORSER, IN ACCORDANCE WITH THE FOLLOWING RULES: ADMISSIBLE TO SHOW THAT, AS BETWEEN OR AMONG THEMSELVES, THEY HAVE AGREED
OTHERWISE. JOINT PAYEES OR JOINT INDORSEES WHO INDORSE ARE DEEMED TO INDORSE
(A) IF THE INSTRUMENT IS PAYABLE TO THE ORDER OF A THIRD PERSON, HE IS LIABLE TO THE JOINTLY AND SEVERALLY.
PAYEE AND TO ALL SUBSEQUENT PARTIES.
(B) IF THE INSTRUMENT IS PAYABLE TO THE ORDER OF THE MAKER OR DRAWER, OR IS
PAYABLE TO BEARER, HE IS LIABLE TO ALL PARTIES SUBSEQUENT TO THE MAKER OR DRAWER.
Ø As a rule, all indorsers are liable in the order of their indorsement.
(C) IF HE SIGNS FOR THE ACCOMMODATION OF THE PAYEE, HE IS LIABLE TO ALL PARTIES o An indorser is liable to all indorsers subsequent to him, but not to prior indorsers.
SUBSEQUENT TO THE PAYEE.
Ø All indorsers may have an agreement among themselves as to the priority or sequence of
their liability which can be proved by parol evidence.
o But such agreement, if there really is one, will not be binding on the holder. The
holder has the right to collect from any of them at random.
Ø This refers to an accommodated payee or indorser who does not expect the accommodation SEC. 82. WHEN PRESENTMENT FOR PAYMENT IS EXCUSED. - PRESENTMENT FOR PAYMENT IS
party to pay the instrument on maturity date. EXCUSED:
o The accommodated party therefore becomes the PPL. In this case, presentment
for payment is not required to make him liable on the instrument. (A) WHERE, AFTER THE EXERCISE OF REASONABLE DILIGENCE, PRESENTMENT, AS REQUIRED
Example BY THIS ACT, CANNOT BE MADE;
I promise to pay to the order of B P5,000.00 30 days (B) WHERE THE DRAWEE IS A FICTITIOUS PERSON;
after date. (C) BY WAIVER OF PRESENTMENT, EXPRESS OR IMPLIED.
(Sgd.) A
SEC. 84. LIABILITY OF PERSON SECONDARILY LIABLE, WHEN INSTRUMENT DISHONORED. - Ø When a particular or specific bank is designated in the instrument as the place of payment,
SUBJECT TO THE PROVISIONS OF THIS ACT, WHEN THE INSTRUMENT IS DISHONORED BY NON- the bank becomes the agent of the maker and must pay the holder, debiting afterwards the
PAYMENT, AN IMMEDIATE RIGHT OF RECOURSE TO ALL PARTIES SECONDARILY LIABLE account of the maker.
THEREON ACCRUES TO THE HOLDER. Ø If it says, for example, “any bank in Manila,” and the holder presented it for payment in a
bank where the maker has a deposit, such bank may refuse to pay the PN as the instrument
Ø The holder acquires the right of recourse against PSL only after he has given notice of does not constitute an authority for that particular bank to pay the note chargeable from
dishonor, either by non-acceptance or by non-payment to the PSL within 24hrs after the such deposit.
dishonor by the PPL.
Example
Ø Parties who may give a notice of dishonor: October 1, 1995
1. Holder; I promise to pay to the order of B P5,000.00 30 days
2. Another party on behalf of the holder; after date.
3. Any of the PSL who may be compelled to pay the holder; or (Sgd.) A
4. Another party in behalf of the PSL.
Ø If the instrument is dishonored in the hands of an agent, the latter may give notice of
Ø Explanation: Subsequent indorsements: B-C-D-E-F. Suppose F authorizes X to collect dishonor to:
from A on his behalf and A dishonors the note by non-payment. 1. All the PSL in his own name, or on behalf of his principal; or
o X may either: 2. His principal, as if the agent had been an independent holder.
1. Give notice of dishonor to all PSL in his own name or on behalf of F;
or SEC. 95. WHEN NOTICE SUFFICIENT. - A WRITTEN NOTICE NEED NOT BE SIGNED AND AN
2. He may inform F of the dishonor and F himself may give the notice of INSUFFICIENT WRITTEN NOTICE MAY BE SUPPLEMENTED AND VALIDATED BY VERBAL
dishonor to all PSL. COMMUNICATION. A MISDESCRIPTION OF THE INSTRUMENT DOES NOT VITIATE THE NOTICE
o In either case, the notice of dishonor inures to the benefit of: UNLESS THE PARTY TO WHOM THE NOTICE IS GIVEN IS IN FACT MISLED THEREBY.
1. Subsequent holders.
• If notice of dishonor is given to B, C, D and E by F or by X,
and F subsequently negotiated to G. SEC. 96. FORM OF NOTICE. - THE NOTICE MAY BE IN WRITING OR MERELY ORAL AND MAY BE
• G can collect from anyone of the PSL without giving them GIVEN IN ANY TERMS WHICH SUFFICIENTLY IDENTIFY THE INSTRUMENT, AND INDICATE THAT
notice of dishonor because the notice given to them by F IT HAS BEEN DISHONORED BY NON-ACCEPTANCE OR NON-PAYMENT. IT MAY IN ALL CASES BE
inures to the benefit of G. GIVEN BY DELIVERING IT PERSONALLY OR THROUGH THE MAILS.
2. All prior parties who have a right of recourse against such party given.
• If F gives notice of dishonor to all PSL, the effect will be:
o E can collect from D without giving notice of Ø The above sections must be correlated.
dishonor because notice was given F to D. Ø To be valid and binding on the PSL, a notice of dishonor, either by non-acceptance or non-
o D from C; C from B. payment, must conform with the following requirements.
SEC. 97. TO WHOM NOTICE MAY BE GIVEN. - NOTICE OF DISHONOR MAY BE GIVEN EITHER TO
THE PARTY HIMSELF OR TO HIS AGENT IN THAT BEHALF.
Ø Notice of dishonor to a PPL who is judicially adjudged insolvent or who may have made
an assignment for the benefit of his creditors, may be given to:
1. The insolvent party secondarily liable himself; or
Ø Notice of dishonor may be given either to: 2. His trustee.
1. PSL; or
2. His authorized representative. SEC. 102. TIME WITHIN WHICH NOTICE MUST BE GIVEN. - NOTICE MAY BE GIVEN AS SOON AS
§ Ex. At place of business – to the secretary. THE INSTRUMENT IS DISHONORED AND, UNLESS DELAY IS EXCUSED AS HEREINAFTER
At place of residence – to wife or children or any other member PROVIDED, MUST BE GIVEN WITHIN THE TIME FIXED BY THIS ACT.
of his household.
Ø Rules:
SEC. 98. NOTICE WHERE PARTY IS DEAD. - WHEN ANY PARTY IS DEAD AND HIS DEATH IS
1. Notice of dishonor must be given on the following day after the instrument is
KNOWN TO THE PARTY GIVING NOTICE, THE NOTICE MUST BE GIVEN TO A PERSONAL
dishonored – construed as within 24hrs after the date of dishonor.
REPRESENTATIVE, IF THERE BE ONE, AND IF WITH REASONABLE DILIGENCE, HE CAN BE FOUND.
IF THERE BE NO PERSONAL REPRESENTATIVE, NOTICE MAY BE SENT TO THE LAST RESIDENCE 2. Notice of dishonor to all PSL made before the maturity date of the instrument is
OR LAST PLACE OF BUSINESS OF THE DECEASED.
improper notice and is not valid to hold them liable.
3. BOE which requires presentment for acceptance – notice of dishonor by non-
acceptance must be sent to all the PSL, including the drawer, within 24hrs after
Ø When the holder or the party giving notice knows that a PSL is dead, he must give notice the drawee refused to accept the bill.
of dishonor to: 4. PN and duly accepted BOE – notice of dishonor by non-payment must be given
1. The legal representative of the deceased PSL, if there is one and can be found; to all the PSL within 24hrs after the instrument is dishonored by non-payment.
or 5. If presentment for payment is excused, the instrument is deemed dishonored only
2. The last known residence or place of business of the deceased PSL, if there is no when the note or bill remains overdue and unpaid after its maturity date, in which
legal representative. case notice may properly be given to the PSL.
Ø When the holder or the party giving notice has no knowledge of the death of the PSL, notice 6. General rule: If the holder gives notice of dishonor to only one PSL, all the other
of dishonor sent to the deceased PSL’s last known residence or place of business is PSL are discharged from liability.
sufficient. § Exception: When that one PSL gives another notice to all prior parties
within 24hrs after his receipt of the holder’s notice.
SEC. 99. NOTICE TO PARTNERS. - WHERE THE PARTIES TO BE NOTIFIED ARE PARTNERS, NOTICE
TO ANY ONE PARTNER IS NOTICE TO THE FIRM, EVEN THOUGH THERE HAS BEEN A
DISSOLUTION.
Ø If the instrument is a partnership liability, the holder or the party giving notice of dishonor
may under the principle that partners are mutual agents of each other, give notice to:
1. Any one of the partners even though there has been a dissolution; or
2. Any of the surviving partners if one partner is dead.
29 YAP, K. | ATENEO LAW
SEC. 103. WHERE PARTIES RESIDE IN SAME PLACE. - WHERE THE PERSON GIVING AND THE SEC. 106. DEPOSIT IN POST OFFICE; WHAT CONSTITUTES. - NOTICE IS DEEMED TO HAVE BEEN
PERSON TO RECEIVE NOTICE RESIDE IN THE SAME PLACE, NOTICE MUST BE GIVEN WITHIN THE DEPOSITED IN THE POST-OFFICE WHEN DEPOSITED IN ANY BRANCH POST OFFICE OR IN ANY
FOLLOWING TIMES: LETTER BOX UNDER THE CONTROL OF THE POST-OFFICE DEPARTMENT.
(A) IF GIVEN AT THE PLACE OF BUSINESS OF THE PERSON TO RECEIVE NOTICE, IT MUST BE
GIVEN BEFORE THE CLOSE OF BUSINESS HOURS ON THE DAY FOLLOWING.
Ø Notice of dishonor may be deposited at:
(B) IF GIVEN AT HIS RESIDENCE, IT MUST BE GIVEN BEFORE THE USUAL HOURS OF REST ON THE 1. Central Post Office;
DAY FOLLOWING.
2. Any branch of the post office;
(C) IF SENT BY MAIL, IT MUST BE DEPOSITED IN THE POST OFFICE IN TIME TO 3. Any mail box under the control of the post office; or
REACH HIM IN USUAL COURSE ON THE DAY FOLLOWING.
4. Any mail chute under the control of the post office.
5. Opinion of Atty. Ampil: Any other electronic device/application.
Ø Rules when parties reside in the same place: SEC. 107. NOTICE TO SUBSEQUENT PARTY; TIME OF. - WHERE A PARTY RECEIVES NOTICE OF
1. If given at the place of business of the person to receive notice – must be before DISHONOR, HE HAS, AFTER THE RECEIPT OF SUCH NOTICE, THE SAME TIME FOR GIVING NOTICE
the close of business hours on the day following. TO ANTECEDENT PARTIES THAT THE HOLDER HAS AFTER THE DISHONOR.
2. If given at his residence – must be given before the usual hours of rest on the
day following.
3. If sent by mail – must be deposited in the post office in time to reach him in Ø When the holder gives notice of dishonor to only one PSL, the general effect is that all
usual course on the day following. other parties are automatically discharged.
o However, such PSL can protect his right of reimbursement by giving a separate
SEC. 104. WHERE PARTIES RESIDE IN DIFFERENT PLACES. - WHERE THE PERSON GIVING AND notice of dishonor to all prior parties within 24hrs after his receipt of the notice
THE PERSON TO RECEIVE NOTICE RESIDE IN DIFFERENT PLACES, THE NOTICE MUST BE GIVEN
given him by the holder.
WITHIN THE FOLLOWING TIMES:
o All parties subsequent to him are deemed discharged.
(A) IF SENT BY MAIL, IT MUST BE DEPOSITED IN THE POST OFFICE IN TIME TO GO BY MAIL THE SEC. 108. WHERE NOTICE MUST BE SENT. - WHERE A PARTY HAS ADDED AN ADDRESS TO HIS
DAY FOLLOWING THE DAY OF DISHONOR, OR IF THERE BE NO MAIL AT A CONVENIENT HOUR ON SIGNATURE, NOTICE OF DISHONOR MUST BE SENT TO THAT ADDRESS; BUT IF HE HAS NOT
LAST DAY, BY THE NEXT MAIL THEREAFTER. GIVEN SUCH ADDRESS, THEN THE NOTICE MUST BE SENT AS FOLLOWS:
(B) IF GIVEN OTHERWISE THAN THROUGH THE POST OFFICE, THEN WITHIN THE TIME THAT
NOTICE WOULD HAVE BEEN RECEIVED IN DUE COURSE OF MAIL, IF IT HAD BEEN DEPOSITED IN (A) EITHER TO THE POST-OFFICE NEAREST TO HIS PLACE OF RESIDENCE OR TO THE POST-
THE POST OFFICE WITHIN THE TIME SPECIFIED IN THE LAST SUBDIVISION. OFFICE WHERE HE IS ACCUSTOMED TO RECEIVE HIS LETTERS; OR
(B) IF HE LIVES IN ONE PLACE AND HAS HIS PLACE OF BUSINESS IN ANOTHER, NOTICE MAY BE
SENT TO EITHER PLACE; OR
Ø Rules when parties reside in different places: (C) IF HE IS SOJOURNING IN ANOTHER PLACE, NOTICE MAY BE SENT TO THE PLACE
1. By mail – the notice must be deposited or posted in the post office in time to go WHERE HE IS SO SOJOURNING.
by mail the day following the day of dishonor.
2. By any other means other than through the post office – notice must be given to BUT WHERE THE NOTICE IS ACTUALLY RECEIVED BY THE PARTY WITHIN THE TIME SPECIFIED
PSL at such a time following the dishonor as to ensure that the latter will receive IN THIS ACT, IT WILL BE SUFFICIENT, THOUGH NOT SENT IN ACCORDANCE WITH THE
it at the same time had the notice been sent by mail as provided for in the REQUIREMENT OF THIS SECTION.
preceding number.
SEC. 105. WHEN SENDER DEEMED TO HAVE GIVEN DUE NOTICE. - WHERE NOTICE OF Ø Rules on where to send the notice of dishonor:
DISHONOR IS DULY ADDRESSED AND DEPOSITED IN THE POST OFFICE, THE SENDER IS DEEMED
1. If a party adds an address to his signature, the notice must be sent there;
TO HAVE GIVEN DUE NOTICE, NOTWITHSTANDING ANY MISCARRIAGE IN THE MAILS.
2. If there is none, must be sent either to:
a. Post office nearest his place of residence, or the post office where he
is accustomed to receive his letters;
Ø Notice of dishonor must be: b. His residence or place of business; or
1. Duly addressed; and c. Place where he is sojourning.
2. Properly deposited in the post office in accordance with the preceding sections
to bind the PSL, irrespective of any miscarriage in the mails. SEC. 109. WAIVER OF NOTICE. - NOTICE OF DISHONOR MAY BE WAIVED EITHER BEFORE THE
TIME OF GIVING NOTICE HAS ARRIVED OR AFTER THE OMISSION TO GIVE DUE NOTICE, AND THE
WAIVER MAY BE EXPRESSED OR IMPLIED.
SEC. 116. NOTICE OF NON-PAYMENT WHERE ACCEPTANCE REFUSED. - WHERE DUE NOTICE OF
DISHONOR BY NON-ACCEPTANCE HAS BEEN GIVEN, NOTICE OF A SUBSEQUENT DISHONOR BY
NON-PAYMENT IS NOT NECESSARY UNLESS IN THE MEANTIME THE INSTRUMENT HAS BEEN
ACCEPTED.
Example
Pay to the order of B the sum of P5,000.00 30 days after
sight.
(Sgd.) A
To: X
B indorses the bill to C
(A) BY PAYMENT IN DUE COURSE BY OR ON BEHALF OF THE PRINCIPAL DEBTOR; (A) BY ANY ACT WHICH DISCHARGES THE INSTRUMENT;
(B) BY PAYMENT IN DUE COURSE BY THE PARTY ACCOMMODATED, WHERE THE INSTRUMENT (B) BY THE INTENTIONAL CANCELLATION OF HIS SIGNATURE BY THE HOLDER;
IS MADE OR ACCEPTED FOR HIS ACCOMMODATION; (C) BY THE DISCHARGE OF A PRIOR PARTY;
(C) BY THE INTENTIONAL CANCELLATION THEREOF BY THE HOLDER; (D) BY A VALID TENDER OF PAYMENT MADE BY A PRIOR PARTY;
(D) BY ANY OTHER ACT WHICH WILL DISCHARGE A SIMPLE CONTRACT FOR THE PAYMENT OF (E) BY A RELEASE OF THE PRINCIPAL DEBTOR UNLESS THE HOLDER'S RIGHT OF RECOURSE
AGAINST THE PARTY SECONDARILY LIABLE IS EXPRESSLY RESERVED;
MONEY;
(E) WHEN THE PRINCIPAL DEBTOR BECOMES THE HOLDER OF THE INSTRUMENT AT OR AFTER (F) BY ANY AGREEMENT BINDING UPON THE HOLDER TO EXTEND THE TIME OF PAYMENT OR TO
POSTPONE THE HOLDER'S RIGHT TO ENFORCE THE INSTRUMENT UNLESS MADE WITH THE
MATURITY IN HIS OWN RIGHT.
ASSENT OF THE PARTY SECONDARILY LIABLE OR UNLESS THE RIGHT OF RECOURSE AGAINST
SUCH PARTY IS EXPRESSLY RESERVED.
Discharge of
Notes
Instrument
When PSL
(1) By payment in due Ø Payment in due course: Notes
Discharged
course by or on behalf 1. Made at or after the maturity date of the
of the principal debtor. instrument; (1) By any act which Ø Refer to previous section.
2. To the holder thereof; and discharges the Ø Because the basis to hold the PSL liable is the dishonor by
(2) By payment in due instrument. non-acceptance or non-payment made by the PPL on the
3. In good faith and without notice that the title of
course by the party instrument which was, however, cancelled.
the holder is defective.
accommodated, where
the instrument is made (2) By the intentional Ø Effects when the holder intentionally cancels the signature
or accepted for his cancellation of his of an indorser:
accommodation. signature by the holder. 1. Indorser is discharged; and
2. All PSL and subsequent to the indorser whose
(3) By the intentional Ø As long as the clear intent of the holder to cancel the signature is cancelled are also discharged. (Sec.
cancellation thereof by instrument can be established, cancellation may be made in 48)
the holder. several ways:
1. Writing across the face of the instrument the word (3) By the discharge of Ø If the holder discharges an indorser by some act, other than
“cancelled.” a prior party. by operation of law, its effects are:
2. Making a big cross or “X” across the face of the 1. Indorser is discharged; and
note; or 2. All subsequent indorsers are discharged –
3. Intentionally destroying the instrument, such as because their right of recourse to collect from the
tearing or burning it. party first discharged has been cut off.
(4) By any other act Ø Other modes of extinguishment as from Art. 1231 of (4) By a valid tender of Ø If, after the holder gives notice of dishonor to all PSL, one
which will discharge a Obligations and Contracts: payment made by a of the indorsers makes a valid tender of payment to the
simple contract for the 1. Remission or condonation – voluntary surrender prior party. holder, and the holder unjustifiably refuses to accept such
payment of money. of the instrument by the holder to the maker or tender – its effects:
PPL without collecting on the note; 1. Indorser making the tender is discharged; and
2. Rescission of the contract of sale or whatever for 2. All indorsers subsequent to him are discharged.
which an instrument has been issued; or (5) By a release of the Ø Rules:
3. Renunciation, compensation, novation and principal debtor unless 1. If the holder releases the principal debtor or PPL
prescription. the holder’s right of unqualifiedly – all PSL are discharged.
recourse against the 2. If the holder wishes to release the principal debtor
(5) When the principal Ø Merger or confusion – whereby the person of the principal PSL is expressly and still retain liability of the PSL – he must
debtor becomes the debtor and that of the principal creditor are blended in one reserved. either:
holder of the instrument and the same person. a. Make a reservation of his right to
at or after maturity in collect from them before he makes the
his own right. release; or
Example (3) Time or place of Ø It will affect the liability of the parties to the instrument.
payment. (Particularly where a specific place of payment is specified)
I promise to pay to the order of B P5,000.00 30 days
after date. (4) Number or relation Ø Some examples:
(Sgd.) A of the parties. 1. Changing the name of the payee;
2. Adding a co-maker in the note without maker’s
Ø Explanation: Suppose A issued the note to B and B negotiates to C. With the consent of consent;
B, C alters the mount from P5,000.00 to P15,000.00 and negotiates the note to D-E-F-G. 3. Erasing the words “Agent fo X” in a check
o If G is not HDC: payable to “M, agent for X.”
§ G cannot collect from A who is a party prior to the fraudulent 4. Inserting the word “trustee” after the name of the
alteration. payee.
§ G can collect from B P15,000.00 because B consented. (5) Medium or currency Ø R.A. 529 – prohibits any stipulation in the instrument that
§ G can collect from C P15,000.00 because C made the alteration. in which payment is to the sum certain will be payable in foreign currency.
§ G can collect P15,000.00 from D, E or F because they are regular be made.
indorsers.
(6) Adds a place of Ø Changes the liability of the parties.
payment where no
o If G is HDC:
§ G can collect from A P5,000.00, the original tenor. place of payment is
specified.
§ G can collect from B, C, D and E (PSL) P15,000.00 because of the
reasons above. (7) Any other change or Ø Like changing the nature of the indorsements. (Ex. Erasing
addition which alters “Pay to X” thereby converting the special indorsement into
SEC. 125. WHAT CONSTITUTES A MATERIAL ALTERATION. - ANY ALTERATION WHICH the effect of the a general indorsement.
CHANGES: instrument in any
respect.
(A) THE DATE;
(B) THE SUM PAYABLE, EITHER FOR PRINCIPAL OR INTEREST;
(C) THE TIME OR PLACE OF PAYMENT:
(D) THE NUMBER OR THE RELATIONS OF THE PARTIES;
(E) THE MEDIUM OR CURRENCY IN WHICH PAYMENT IS TO BE MADE;
(F) OR WHICH ADDS A PLACE OF PAYMENT WHERE NO PLACE OF PAYMENT IS SPECIFIED, OR
ANY OTHER CHANGE OR ADDITION WHICH ALTERS THE EFFECT OF THE INSTRUMENT IN ANY
RESPECT, IS A MATERIAL ALTERATION.
Section 114: 5 instances when a notice of dishonor need not be given to drawer
1. Where the drawer and drawee are the same person Primarily Liable: Acceptor PL: Maker
2. When the drawer is fictitious person or a person not having capacity to contract Secondarily Liable: Maker, Indorser SL: Indorser
3. When the drawer is the person to whom the instrument is presented for payment
4. Where the drawer has no right to expect or require that the drawee or acceptor honors the
instrument
5. Where the drawer countermanded payment Section 119: How nego instrument is discharged
1. By payment in due course or on behalf of the principal debtor
Section 115: 3 instances when notice of dishonor need not be given to indorser 2. By payment in due course by the party accommodated, where the instrument is made or
1. When the drawee is a fictitious person or a person not having capacity to contract and accepted for his accommodation
the indorser was aware of that fact at the time he indorsed the instrument 3. By the intentional cancellation thereof by the holder
2. When the indorser is the person to whom the instrument is presented for payment 4. By any other act which will discharge a simple contract for the payment of money
3. Where the instrument was made or accepted for his accommodation 5. When the principal debtor becomes the holder of the instrument at or after the maturity
in his own right (merger or confusion(
Difference between B/E and PN
Bills of Exchange Promissory note Section 120: Instances when persons secondarily liable are discharged
1. By any act which discharges the instrument
2. By the intentional cancellation of his signature by the holder
3. By the discharge of a prior party
Contains unconditional 4. By a valid tender of payment made by a prior party
order addressed by one 5. By a release of the principal debtor unless the holder’s right of recourse against the party
Contains unconditional promise made by one
person to another requiring secondarily liable is expressly reversed
person to another to pay it
the latter to pay the 6. By any agreement binding upon the holder to extend the tine of payment to postpone the
instrument holder’s right to enforce the instrument unless made with the assent of the party
secondarily liable or unless the right of recourse against such party is reserved
3 parties: Drawer, Drawee,
2 parties: Maker; Payee/Bearer
Payee
Section 124: Effect of alteration of instrument
(When a nego instrument is materially altered without the assent of all the primary parties liable
Drawer, the one who issues Maker, the one who issues thereon,)
the instrument, is only secondarily liable. the instrument, is primarily liable. 1. It is avoided
A bill drawn payable to the drawer’s own 2. Except as against the party who has himself made, authorized, or assented to the
Note drawn payable to the maker’s own order alteration and subsequent indosers
order is complete without indorsement,
is not complete until endorsed by him. [But if in the hands of Ahidc Not a party to the alteration, he may enforce payment thereof
provided it has been accepted by the drawee.
according to its original tenor]