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Notes on Campos Introduction 1. a. P500.

00 kinds of negotiable instruments

Negotiable Instruments Law


2. a. parties and the nature of their liability promissory note

promissory notes a promise to pay in money October 6, 1979

2 Parties: Maker promissor Payee the person to whom the promise to pay is made b. bill of exchange

For value I received, I promise to pay to the order of Carolina Infante the sum of Five Hundred Pesos (P500.00), Philippine currency, on or before March 3, 1982. (Sgd.) Vicente Canlas Other forms of promissory notes include the certificate of deposit and the bond Certificate of deposit an instrument issued by a bank reciting a deposit of a certain sum of money, payable either at a fixed time or on demand, to the depositor named therein. Bond an evidence of indebtedness issued by a corporation, public or private, payable at a definite date in the future, usually for a long term; a written promise of the corporation to pay a definite sum of money on the day named b. bill of exchange an order made by one person to another to pay money to a third person October 6, 1979

3 Parties: Drawer person who gives the order to pay the bill Drawee addressee of the order Payee the person whom the payment is to be made When a negotiable instrument is negotiated or indorsed, the person so doing is called an indorser. The person to whom he negotiates it is the indorsee, who, by such negotiation, becomes the holder of the instrument. As to the nature of their liability, the parties to a negotiable instrument are either primarily or secondarily liable. Primary party is the one who is absolutely and unconditionally required to pay the instrument when it falls due; e.g. maker of a promissory note, in a bill of exchange, there is no person primarily liable to pay until and unless the drawee accepts the order of the drawer to pay. Before he accepts, such drawee is not liable on the instrument and he cannot be compelled by the holder to accept or pay it. But if and when the drawee accepts, he becomes an acceptor who is absolutely bound to pay on the date specified on the bill Secondary party held responsible should the primary parties fail to pay; e.g. drawer of the bill of exchange, indorsers of either bill or note. Liability is conditioned on 2 factors (1) that demand or presentment be duly made on the primary party, and (2) should the said party dishonor (i.e. fail to pay or accept) such instrument, that a notice of such dishonor be given to the secondary party sought to be charged An indorser by indorsing the bill or note impliedly enters into 2 contracts: (1) he is selling or transferring the instrument to the indorsee, thus assuming responsibilities similar to that of a seller or transferor of personal property; and (2) he warrants that he will pay the instrument when the 2 conditions for his liability have been fulfilled. The holder can hold any indorser liable should the maker or acceptor fail to pay, provided these 2 conditions are complied 3. functions of negotiable instruments function 1: as a substitute for money in payment for property or services

P500.00

Thirty days after date, pay to Carolina Infante or order the sum of Five Hundred Pesos (P500.00), Philippine currency. Value received. (Sgd.) Vicente Canlas To: Ferdinand Marcos 249 Dart, Manila Check most commonly used form of bill of exchange, wherein the one who issues it orders his bank to pay the person named on the check. A check is always payable on demand Draft a form of bill of exchange used mainly in transactions between physically remote from each other. It is an order made by one person, say the buyer of the goods, addressed to a person having in his possession funds of such buyer, ordering the addressee to pay the purchase price to the seller of the goods Bank draft order is made by one bank to another bank

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4. concept of negotiability

function 2: as a means of creating and transferring credit function 3: to facilitate the sale of goods

Although negotiable instruments do not constitute legal tender, they often take the place of money as a means of payment (it is more convenient means of paying bills as well as of keeping records of such payments) Examples for the 3 functions: function 1: as a substitute for money in payment for property or services

A person who takes a negotiable instrument can rely on its face and need not inquire into past events which gave rise to its execution. Any inquiry will require delay in commercial transactions where profitability depends largely on the briskness with which they are consummated. The NIL aims to encourage facility, convenience, and efficiency in commercial transactions. In the study of law, one has to keep in mind that there are usually two contracts involved whenever a negotiable instrument is issued a contract of sale and a contract to pay. As far as the original parties are concerned, promise to pay is dependent on the validity of the contract of sale. But once the negotiable note is negotiated to a third person, it becomes completely independent of the sale which gave rise to it. As far as the third party is concerned, there is only one contract the promise to pay 5. the origin of negotiable instruments

Under Article 1249 CC, the delivery of promissory notes payable to order or bills of exchange and other mercantile documents shall produce the effect of payment only when they have been cashed or when through the fault of the creditor they have been impaired. In the meantime the action derived from the original obligation shall be held in abeyance. Thus, negotiable instruments validity as a means of payment is conditioned on its being honored by the person bound by its terms to pay it. There should be payment versus mere acceptance. However, if non-payment is caused by the plaintiffs negligence, payment will be deemed to have been effected, and the obligation for which it was given as conditional payment will be deemed discharged. The tender of check is sufficient to compel redemption of foreclosed property since such redemption is not an obligation but a right. However, such tender is not in itself payment that relieves the redemptioner from his liability to pay the redemption price function 2: as a means of creating and transferring credit

from the merchants and traders of the Middle Ages, more specifically among Florentine and Venetian merchants along the Adriatic Sea. The bill of exchange was devised to facilitate the contract of cambium and to avoid the risks of transporting money 6. history of the Negotiable Instruments Law

The NIL is a verbatim reproduction of the Uniform Negotiable Instruments Law of the United States, approved by the National Conference of Commissioners on Uniform States Laws in 1896. This statute was in turn patterned after the English Bill of Exchange Act passed by Parliament in 1882, the first codification of the law on negotiable paper. In this country, the NIL has proved to be one of the most stable statutes. Since its enactment in 1911, not a single amendment to it has been made. However, in the Unites States, an amended NIL has been passed otherwise known as the Uniform Commercial Code, which has not been adopted by the Philippine Laws. 7. applicability of the Negotiable Instruments Law

If Mia wants to buy a car on installment basis, the seller and Mia may agree that Mia make a down payment and sign a promissory note for the balance. The car is delivered to Mia and she will be free to use it subject only to his obligation to pay the note when it falls due. In this case, the promissory note is used as a means of creating credit function 3: to facilitate the sale of goods

The conduct of international trade is facilitated by the use of a bill of exchange called a draft. If A in Manila wants to import a certain machine from B Co. in San Francisco, payment thereof in cash would be highly impractical. A may not be personally known to B Co. so that his personal check may not be acceptable as payment. The usual method of payment in transactions like this is by the use of a draft, usually covered by a letter of credit.

NIL only applies to negotiable instruments. If the instrument is not a negotiable instrument, applicable law is the general law on contracts. Section 196 of the NIL provides: Sec. 196. CASES NOT PROVIDED FOR IN ACT. Any case not provided for in this Act shall be governed by the provisions of existing legislation, or in default thereof, by the rules of the Law of Merchant

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Sec. 19. SIGNATURE BY AGENT; AUTHORITY; HOW SHOWN. The signature of any party may be made by a duly authorized agent. No particular form of appointment is necessary for this purpose; and the authority of the agent may be established as in other cases of agency In writing includes print and it includes not only what is written with pen or pencil, but also what is typed. The signature is binding whether it is in ones handwriting, or printed, engraved, lithographed or photographed, so long as it is intended or adopted as the signature of the signer or made with his authority. Though the signature of the maker or drawer usually appears at the lower right hand corner, it may appear on any part of the instrument. It will be valid and binding as long as the intention to make the instrument the makers or drawers is shown. However, if the signature is so placed upon the instrument that it is not clear in what capacity the person intended to sign, he is deemed an indorser, and not a maker or drawer. 2. unconditional order or promise to pay

The Law Merchant is a system which consists of certain principles of equity and usages of trade which general convenience a common sense of justice have established, to regulate the dealings of merchants and mariners in all the commercial countries of the civilized world Chapter 1: Requisites of Negotiability Sec. 1. FORM OF NEGOTIABLE INSTRUMENTS. An instrument to be negotiable must conform to the following requirements: 1. it must be in writing and signed by the maker or drawer; 2. must contain an unconditional promise or order to pay a sum certain in money; 3. must be payable on demand, or at a fixed or determinable future time; 4. must be payable to order or to bearer; and 5. where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty Sec. 184. PROMISSORY NOTE DEFINED. A negotiable promissory note within the meaning of this Act is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer. Where a note is drawn to the makers own order, it is not complete until indorsed by him. Sec. 126. BILL OF EXCHANGE DEFINED. A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. Section 1 gives a definition of a negotiable instrument. Any instrument which has the requisites enumerated therein is negotiable and is governed by the NIL. All other instruments are non-negotiable The fact that an instrument does not meet the foregoing requisites will not affect its validity, the only consequence being that it will be governed not by the NIL but by the general law on contracts 1. written form and signature

The instrument must contain a promise or an order to pay. Mere acknowledgement of a debt does not constitute a promise. However, the word promise is not absolutely necessary. Any expression equivalent to a promise is sufficient, i.e. on demand In a bill of exchange, words equivalent to an order are sufficient. An order is a command or imperative direction. A mere request or authority to pay does not constitute an order. The instrument is by its nature demanding a right. However, although the use of polite words like please does not of itself deprive the instrument of its characteristics as an order, its language must clearly indicate a demand upon the drawee to pay a. when unconditional

Sec. 18. LIABILITY OF PERSON SIGNING IN TRADE OR ASSUMED NAME. No person is liable on the instrument whose signature does not appear thereon, except as herein otherwise provided. But one who signs in a trade or assumed name will be liable to the same extent as if he had signed in his own name.

Sec. 3. WHEN PROMISE IS UNCONDITIONAL An unqualified order or promise to pay is unconditional within the meaning of this Act though coupled with 1. an indication of a particular fund out of which reimbursement is to be made, or a particular account to be debited with the amount; or 2. a statement of the transaction which gives rise to the instrument But an order or promise to pay out of a particular fund is not unconditional An unconditional promise or order greatly enhances its ability to pass freely from one person to another e.g. of a conditional promise (not negotiable) I promise to pay Andoy or order the sum of P100 if he passes the board

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currency at a fixed rate of exchange or at the rate current at the time payment is made. This provision does not affect the negotiability of the instrument A provision in an instrument for attorneys fees, but leaving the amount thereof blank, amounts to a promise to pay a reasonable sum as attorneys fees, and does not make the instrument non-negotiable. Such amount may be fixed by the court. 4. payable in money

e.g. of promise to pay out of a particular fund (not negotiable) I promise to pay Andoy or order the sum of P100 out of the rent which may be collected from my house in Baguio or a Government Treasury warrant which on its face bears the words payable from the appropriation for food administration e.g. of promise with an indication of a particular fund out of which reimbursement is to be made, or a particular account to be debited with the amount (negotiable) Pay to the order of Andoy the sum of P100. Reimburse yourself from the rentals of my house, or xxx debit the same to my account e.g. of promise with a statement of the transaction which gives rise to the instrument (negotiable) - Pay to the order of Andoy the sum of P100. This note is given in payment of the purchase price of a car this day sold and delivered to Lori and accepted by Inna in full compliance with the contract, or as per contract The fact that the condition has been fulfilled will not convert it into a negotiable one 3. sum payable must be certain

Instrument must be capable of being transformed into money if the holder so wishes. Thus, an instrument is not negotiable if payable in personal property. Money as used in the law is not necessarily limited to legal tender as defined by law but includes any particular kind of current money. However, if a contract contains a stipulation that payment is to be made in a currency other than Philippine currency, such stipulation will be ineffective and the obligation can be discharged only in legal tender. But the negotiability of the instrument will not be affected by said stipulation An instrument which contains an order or promise to do an act in addition to the payment of money is not negotiable (for simplicity in form). Thus a note agreeing to pay taxes assessed upon the note or its mortgage security is not negotiable. But if the order or promise gives the holder an election to require something to be done in lieu of payment of money, an instrument otherwise negotiable will not be affected thereby. But if the option to pay money or something in lieu thereof is with the maker or the person primarily liable, the instrument is not negotiable. 5. certainty of time of payment

Sec. 2. CERTAINTY AS TO SUM; WHAT CONSTITUTES. The sum payable is a sum certain within the meaning of this Act, although it is to be paid 1. with interest; or 2. by stated installments; or 3. by stated installments with a provision that upon default in payment of any installment or of interest, the whole shall become due; or 4. with exchange, whether at a fixed rate or at the current rate; or 5. with costs of collection or an attorneys fee, in case payment shall not be made at maturity Amount payable must be certain. Thus, P500 or what may be due on my deposit book does not express a sum certain An agreement to pay interest does not however render the sum uncertain. The exact amount can be computed without looking beyond the instrument Acceleration or deceleration clause does not render an instrument non-negotiable, since it is entirely without force until either the maturity or its payment before maturity If payable in installments, it has to be stated, i.e., the amount of each installment and its due date are fixed in the instrument An instrument expressed in a foreign currency may contain a provision that the same is payable in Philippine

Instrument must be payable (1) on demand, or (2) at a fixed time, or (3) at a determinable future time. This requirement as to certainty of time of payment is for the purpose of informing the holder of the instrument of the date when he may enforce payment thereof. a. when payable on demand

Sec. 7. WHEN PAYABLE ON DEMAND. An instrument is payable on demand 1. where it is expressed to be payable on demand, or at sight, or on presentation; or 2. in which no time for payment is expressed Where an instrument is issued, accepted or indorsed when overdue, it is, as regards, the person so issuing, accepting, or indorsing it, payable on demand

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Negotiable Instruments Law


Examples under Section 4: e.g. 1 - I promise to pay Andoy or order the sum of P100 thirty days after date e.g. 2 - I promise to pay Andoy or order the sum of P100on or before December 24, 2008 e.g. 3 - I promise to pay Andoy or order the sum of P100sixty days after the death of Adoring d. effect of acceleration provisions Where the option to accelerate the maturity of the instrument is on the maker, the negotiability of the instrument is not affected, whether such option is absolute or conditional. This is the situation covered by Sec 4(b) when it allows a negotiable instrument to be payable on or before a fixed date. The maker may pay earlier than the date fixed but this option, if exercised, would be payment in advance of a legal liability to pay. Where the acceleration is at the option of the holder, whether such acceleration provision renders the instrument non-negotiable depends on the nature of the provision. If the option can be exercised by the holder only upon the happening of a specified event or act over which he has no control, then the negotiable character of the instrument is not affected by the option to accelerate. But where the holders right to exercise the option is unconditional, the time of payment is rendered uncertain and the instrument would not be negotiable. However, the option given to the holder to accelerate the maturity of an installment note upon failure of the maker to pay any installment when due does not affect the negotiability of the instrument. This provision is in fact expressly allowed by Sec 2(c) of the law. The rule would be the same where the acceleration is automatic upon such default. Where the acceleration takes place upon the failure of the maker to deposit additional collateral security to make good a depreciation in value of the original security, the majority view is that such a provision does not destroy the negotiability Acceleration of the maturity of the instrument by operation of law does not affect its negotiability. Should the maker die before the maturity, for instance, the due date is disregarded because the holder should file his claim against the makers estate. A similar situation obtains where the maker is declared an insolvent and the holder proves his claims in the insolvency proceedings e. provisions payment extending time of

I promise to pay Andoy or order the sum of P100 at sight I promise to pay Andoy or order the sum of P100 In both cases, the holder may demand payment at any time. On the other hand, it has been held that in a demand note, the maker likewise has an option to pay at any time, and the refusal of the holder to accept payment will terminate the running of interest, if any is provided in the note. However, the obligation to pay the note maintains. b. payable at a fixed time Example: I promise to pay Andoy or order the sum of P100 on December 24, 2008 Only on the said date December 24, 2008 and not before, may the holder demand payment, the instrument becomes overdue remains valid and negotiable. It is merely converted to a demand instrument c. payable at a future determinable time

Sec. 4. DETERMINABLE FUTURE TIME; WHAT CONSTITUTES. An instrument is payable at a determinable future time, within the meaning of this Act, which is expressed to be payable 1. at a fixed period after date or sight; or 2. on or before a fixed or determinable future time specified therein; or 3. on or at a fixed period after the occurrence of a specified event which is certain to happen, though the time of happening be uncertain. An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect Sec. 11. DATE, PRESUMPTION AS TO. Where the instrument of an acceptance or any indorsement thereon is dated, such date is deemed prima facie to be the true date of the making, drawing, acceptance or indorsement, as the case may be. Sec. 17. CONSTRUCTION WHERE INSTRUMENT IS AMBIGUOUS. Where the language of the instrument is ambiguous, or there are omissions therein, the following rules of construction apply: xxx 3. where the instrument is not dated, it will be considered to be dated as of the time it was issued

Instead of acceleration provision, the instrument may contain a provision allowing extension of payment. An

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b. when instrument is payable bearer to

instrument is negotiable if the extension is exercised by both maker and holder. However, where a note with a fixed maturity provides that the maker has the option to extend the payment until the happening of the contingency, the instrument would be non-negotiable under the second paragraph of Sec 4. The time for payment may never come at all. 6. must be payable to order or bearer

The instrument in order to be considered negotiable must contain the so-called words of negotiability i.e., must be payable to order or to bearer. These words serve as an expression of consent that the instrument may be transferred. A postal money order is not a negotiable instrument. It does not contain words of negotiability and although it may be indorsed once, such indorsement does not convert it into a negotiable instrument because the words of negotiability must appear on the face of the instrument as part of the original contract. On the other hand, where the words or bearer printed in a check are cancelled by the drawer, the instrument cannot be considered negotiable. It is important to distinguish a bearer instrument from an order instrument because they vary in their effects on the rights of the parties. Furthermore, the former may be negotiated by mere delivery, while the latters negotiation requires not only delivery but also the indorsement of the transferor. a. when instrument is payable to order

Sec. 9. WHEN PAYABLE TO BEARER. The instrument is payable to bearer 1. when it is expressed to be so payable; or 2. when it is payable to a person named therein or bearer; or 3. when it is payable to the order of a fictitious or non-existing person, and such fact was known to the person making it so payable; or 4. when the name of the payee does not purport to be the name of any person; or 5. when the only or last indorsement is an indorsement in blank Illustrations: 1. I promise to pay to bearer the sum of P100 If instrument states bearer, Andoy is not negotiable since the word bearer here is used merely to describe Andoy. Payable to holder is payable to bearer because the word holder can be said to be equivalent to the word bearer 2. 3. Pay to Andoy or bearer Payable to Batman/ John Doe or order

A name is fictitious when it is feigned or pretended A note payable to the order of an estate of a person still alive at the time of the execution of the note has been held to constitute to valid bearer paper, since it is payable to a non-existing person. A note payable to the order of the estate of an already deceased person, although not an order note, is a bearer note because the name of the payee does not purport to be the name of any person That the payee is a fictitious or non-existing person must however be known to the maker or drawer. Theory is that maker or drawer intended the instrument to be transferred by mere delivery. If the maker or drawer is not aware that the person he named as payee is a fictitious or non-existent, then the instrument is not a bearer instrument but an order one. Obviously, there is no one who can indorse it, so in effect, it cannot be validly negotiated. 4. 5. Pay to cash or Pay to sundries when the indorsement is an indorsement in blank, the instrument becomes payable to bearer even if originally payable to the order of a specified person

Sec. 8. WHEN PAYABLE TO ORDER. The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order Illustrations: 1. Pay to the order of Andoy, or I promise to pay to the order of Andoy 2. Pay to Andoy or order, or I promise to pay Andoy or order. These are the only 2 ways by which an instrument may be made payable to order. There must always be a specified name in the instrument. Without the words to order or to the order of, the instrument is payable only to the person designated therein and is therefore nonnegotiable. Any subsequent purchaser will not enjoy the advantages of being a holder of a negotiable instrument, but merely step into the shoes of the person designated in the instrument and will thus be open to all defenses available against the latter

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(2) it may be made payable to the order of the maker or the drawer

A blank indorsement cannot however convert a nonnegotiable note to a negotiable one It should be noted that only instruments under paragraphs a and b of Sec 9 are expressly made payable to bearer. See case: Ang Tek Lian v. CA 87 Phil 383 (1950) 7. parties must be designated with certainty a. maker and drawer

Pay to the order of myself the sum of P100 (sgd.) Paolo To Lori Manila

The payee, Paolo is the drawer. Or a note, thus:

The maker or drawer must sign the instrument and his signature is usually written at the lower right-hand corner thereof. The drawees name is usually written on the lower left-hand corner, although in checks the banks name sometimes appears across the top. The payee and the successive indorsees negotiate the instrument by signing on the back. However, if it is not clear from the instrument in what capacity he signs, ambiguity arises. The law solves this by considering such a person as an indorser, and not as a maker or drawer b. payee Sec. 8. WHEN PAYABLE TO ORDER. The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order. It may be drawn payable to the order of 1. a payee who is not maker, drawer, or drawee; or 2. the drawer or maker; or 3. the drawee; or 4. two or more payees jointly; or 5. one or some of several payees; or 6. the holder of an office for the time being Where the instrument is payable to order the payee must be named or otherwise indicated therein with reasonable certainty. An instrument may be payable to anyone of the following as payees: (1) it may be drawn payable to the order of the payee who is not a maker, drawer or drawee

I promise to pay myself or order the sum of P100 (sgd.) Paolo

The payee, Paolo is the maker. However, a note payable to the order of the maker is not complete unless indorsed by the maker first. (3) it may be made payable to the order of the drawee

Pay to the order of yourself the sum of P100 (sgd.) Paolo To: Lori Manila

The payee, Lori is the drawee and the drawer of the bill, Paolo is ordering her to pay herself. (4) it may be made payable to 2 or more payees jointly

Pay to the order of Andoy and Inna the sum of P100

The payees are 2 and are constituted jointly, not in the alternative. Thus, when negotiating the instrument, both of them must indorse. (5) it may be made payable to one or some of several payees in the alternative. In this case, the law does not consider the payee as uncertain

I promise to pay Inna or order the sum of P100. (sgd.) Paolo

The payee, Inna is not the maker Pay to the order of Andoy or Inna the sum of P100

The payees are constituted in the alternative so that only one of them may demand payment for the full amount.

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Where the drawer and drawee are the same person, or where the drawee is a fictitious person, or a person having no capacity to contract, the holder may treat the instrument either as a bill or note, because otherwise, no one can ever be made primarily liable on the bill. Since the drawer is responsible for naming such a drawee, it is to be assumed that he intended to be primarily liable himself. If the bill names no drawee but is accepted by a third party, although the issuer of the bill cannot be held as a drawer, the acceptor should be held as a maker. So that the instrument in this case is treated as a note instead of a bill 8. provisions not affecting negotiability

And only one of them needs to indorse when negotiating the instrument. An instrument payable to the order of A and/ or B is payable in the alternative and not joint payees (6) it may be made payable to the holder of an office for the time being

I promise to pay to the order of the Secretary of X Association the sum of P100

Under this, payee is uncertain. Best interpretation is that the payee is the person who happens to be secretary at any particular moment thereby making the instrument a floating promise Should the name of the payee be misspelled or wrongly designated, does the instrument lose its negotiability as one wherein the payee is not indicated with reasonable certainty? Answer: This is impliedly answered in the negative by Sec 43 which provides that where the name of the payee is wrongly designated or misspelled, he may indorse the instrument as therein described, adding, if he thinks fit, his proper signature. If he may indorse it, then that means that even if his name is misspelled, he can still be regarded as having been otherwise indicated with reasonable certainty. Thus, if the payee is designated as Inna Infanti instead of Inna Infante she should indorse the instrument by signing Inna Infanti and not Infante but she may add the latter if she wants to c. drawee

Sec. 5. ADDITIONAL PROVISIONS NOT AFFECTING NEGOTIABILITY. An instrument which contains an order or promise to do any act in addition to the payment of money is not negotiable. But the negotiable character of an instrument otherwise negotiable is not affected by a provision which 1. authorizes the sale of collateral securities in case the instrument be not paid at maturity; or 2. authorizes a confession of judgment if the instrument be not paid at maturity; or 3. waives the benefit of any law intended for the advantage or protection of the obligor; or 4. gives the holder an election to require something to be done in lieu of the payment of money But nothing in this section shall validate any provision or stipulation otherwise illegal. The negotiable character of an instrument otherwise negotiable is not affected by a provision which authorizes the sale of collateral securities in case the instrument be not paid at maturity. Thus, not only may the instrument state that the note is secured by the pledged or mortgaged property, but also that the collateral may be sold for discharging the debt evidenced by the instrument, thus discharging the instrument itself. An authorization, however, which empowers the holder to sell the collateral before the maturity of the note renders it non-negotiable, because it would in effect grant the holder an option to accelerate the maturity of the instrument, thus rendering the time of payment uncertain. A clause in the instrument which waives the rights of secondary parties to have the instrument duly presented for payment, and their right to due notice of dishonor and of protest is required, does not destroy its negotiability. Likewise, the fact that an instrument bears a seal or designates a particular kind of current money in which payment is to be made, does not affect its negotiable character.

Sec. 128. BILL ADDRESSED TO MORE THAN ONE DRAWEE. A bill may be addressed to two or more drawees jointly, whether they are partners or not; but not to two or more drawees in the alternative or in succession Sec. 130. WHEN BILL MAY BE TREATED AS A PROMISSORY NOTE. Where in a bill the drawer and drawee are the same person, or where the drawee is a fictitious person, or person not having the capacity to contract, the holder may treat the instrument, at his option, either as a bill of exchange or a promissory note. Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. Although a bill may be addressed to 2 or more drawees jointly, it may not be addressed to 2 or more drawees in the alternative or in succession, for otherwise, there would be no certainty as the person to whom the bill should be presented for payment or acceptance.

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that presentment should be made at the address of the person who is to pay, if such address is stated; if not, at the place of business or residence of the person to make payment. 10. rules of construction Sec. 17. CONSTRUCTION WHERE INSTRUMENT IS AMBIGUOUS. Where the language of the instrument is ambiguous, or there are omissions therein, the following rules of construction apply: 1. where the sum payable is expressed in words and also in figures and there is a discrepancy between the two, the sum denoted by the words is the sum payable; but if the words are ambiguous or uncertain, reference may be had to the figures to fix the amount; 2. where the instrument provides for the payment of interest, without specifying the date from which interest is to run, the interest runs from the date of the instrument, and if the instruments is undated, from the issue thereof; 3. where the instrument is not dated, it will be considered to be dated as of the time it was issued; 4. where there is a conflict between the written and printed provisions of the instrument, the written provisions prevail; 5. where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election; 6. where a signature is so placed upon the instrument that it is not clear in what capacity the person making the same intended to sign, he is to deemed as indorser; 7. where an instrument containing the words I promise to pay is signed by two or more persons, they are deemed to be jointly and severally liable thereon Figure $1200 versus written words twelve dollars note is valid up to $12 only as written words are controlling over the figure But in case the words are so ambiguous or uncertain, reference to the figures is made to determine the true amount. Thus, if the check bears the figures $365 and the amount is written as three sixty five dollars, the marginal figures will control Typewritten phrase 7 percent from date a circle was drawn around the figure 7 with pen and ink and above it the figure 8 was made with pen and ink the court held that there is no uncertainty of the interest and that the instrument is negotiable and that the written rate (8%) prevails

See case: PNB v. Manila Oil Refining & By-Products Company, Inc. 43 Phil 445 (1922) The practice of entering judgments in debt on warrants of attorney is of ancient origin. In the course of time a warrant of attorney to confess judgment became a familiar common law security. At common law, there were two kinds of judgments by confession; the one a judgment by cognovit actionem, and the other by confession relicta verificatione. In the absence of statute, there is a conflict of authority as to the validity of a warrant of attorney for the confession of judgment. The weight of opinion is that, unless authorized by statute, warrants of attorney to confess judgment are void, as against public policy cognovit actionem a defendants written confession of action against him; impliedly authorizes plaintiffs attorney to sign judgment and issue execution relicta verificatione a confession of judgment made after plea pleaded; viz., a cognovit actionem accompanied by a withdrawal of the plea 9. omissions not affecting negotiability

Sec. 6. OMISSIONS; SEAL; PARTICULAR MONEY. The validity and negotiable character of an instrument are not affected by the fact that 1. it is not dated; or 2. does not specify the value given, or that any value has been given therefore; or 3. does not specify the place where it is drawn or the place where it is payable; or 4. bears a seal; or 5. designates a particular kind of current money in which payment is to be made But nothing in this section shall alter or repeal any statute requiring in certain cases the nature of the consideration to be stated in the instrument The seal is considered to be part of a, say a corporations signature. The validity and negotiable character of an instrument are not affected by the fact that it is not dated. If date is necessary to fix the maturity of the instrument, the law fills in the gap and considers date of issue as the date of the instrument, and allows any holder to insert the true date It is not necessary to express in a negotiable bill or note that the value was received, because the instrument was presumed to have been issued for a valuable consideration Place is important but not essential. If no place is mentioned, the law again fills in the gap by providing

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Sec. 191. DEFINITIONS AND MEANINGS OF TERMS. ..................... bearer means the person in possession of a bill or note which is payable to bearer; holder means the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof; ..................... A negotiation is a transfer of a negotiable instrument made in such manner that the transferee becomes a holder and possible a holder in due course capable of acquiring a better title to the instrument than that of his transferor. Where an instrument is payable to order, the payee or indorsee in possession of it is the holder. If it is payable to bearer, the person in possession of it is the bearer as well as the holder of the instrument Transfer is a broader term than negotiation. If an instrument is transferred without negotiation, the transfer is a mere assignment which constitutes the transferee as a mere assignee, not a holder, subject to all defenses existing among prior parties. Transfer includes both an ordinary assignment and a negotiation A negotiation may be for value as in a sale, or by way of gift. In either case, there will be a valid transfer. However, the rights acquired by the transferee in each case may be different 3. methods of negotiation

An instrument which begins with I promise to pay but which contains the name of the drawee creates a doubt as to whether it is meant to be a note or bill and may this be treated by the holder as either. The drawer may be held liable as a maker of a note, should the holder choose I promise to pay, and I, we, or either of us, promise to pay, when signed by two persons make them solidarity liable We promise to pay, signed by two persons make them jointly liable Where a person places his signature on the instrument in such a manner that his capacity is not clear, he is deemed to be an indorser, and not a maker, drawer, or acceptor, nor a mere assignor. He therefore assumes all the liabilities imposed by Sec 66 on a general indorser. Chapter 2: Transfer 1. delivery and issuance

Sec. 16. DELIVERY; WHEN EFFECTUAL; WHEN PRESUMED. Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto Delivery of the instrument means transfer of possession, actual or constructive, from one person to another. Delivery may be accomplished by manual transfer of possession or by any other act manifesting intent to transfer right of possession. Without the initial delivery of the instrument from the maker to the payee, there can be no liability on said instrument. Moreover, such delivery must be intended to give effect to the instrument. Once the instrument is no longer in the possession of the person who has signed it, a valid delivery by him is presumed, until the contrary is proved, and as to the holder in due course, the presumption is conclusive, provided the instrument is complete The first delivery of the instrument complete in form, to a person who takes it as a holder, is called the issue or issuance of the instrument. 2. negotiation

An instrument payable to order requires for its negotiation, first, an indorsement by the payee or present holder, and second, its delivery to the transferee or indorsee, who now becomes the holder. An indorsement consists of the signature of the indorser usually on the back of the instrument. An indorsement has a double significance: it constitutes a transfer or sale of the instrument to the indorsee or transferee, and it signifies the agreement of the indorser to answer for the amount represented by the instrument in case of default of the maker or the party primarily liable An instrument payable to bearer can be negotiated by mere delivery. It is a common practice, however, to indorse a bearer instrument whenever it is transferred. It does not impair the negotiation but serves as an additional security to the transferee, since he can hold the indorser liable as such i.e., not only on his warranty that he will pay in case of default of the primary party. One who negotiates by delivery, although he assumes the liabilities of a seller or transferor of the note or bill, does not warrant that he will pay in case the primary party fails to pay. A transfer of a negotiable instrument is effected otherwise than by negotiation when an order instrument

Sec. 30. WHAT CONSTITUTES NEGOTIATION. An instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof. If payable to bearer it is negotiated by delivery; if payable to order it is negotiated by the indorsement of the holder completed by delivery

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5. indorsement must be of entire instrument

is delivered by the payee or special indorsee without his indorsement or where the indorsement is not made properly as required by law. In this case, the transfer is an ordinary assignment of the transferors rights and places the assignee in the place of the assignor, subject to the defenses which may be existing between the prior parties 4. how indorsement made a. by signature on instrument or on allonge

Sec. 32. INDORSEMENT MUST BE OF ENTIRE INSTRUMENT. The indorsement must be an indorsement of the entire instrument. An indorsement which purports to transfer to the indorsee a part only of the amount payable, or which purports to transfer the instrument to two or more indorsees severally, does not operate as a negotiation of the instrument. But where the instrument has been paid in part, it may be indorsed as to the residue The purpose of this provision is to protect the obligors for more than one action on the instrument. The maker and all the prior parties, in assuming liability, took the risk of only one cause of action against them. Example: If a bill for P100 is indorsed by the payee to A for P50 and to B for P50, there is no valid negotiation since it purports to transfer the instrument to two or more persons severally. Neither of them can be considered a holder. At most they are mere assignees, and even so, neither of them can sue on the instrument without bringing in the other as a party to the action. Neither may an indorsement of the instrument to only one person for P50 be valid, for then it would only be partial transfer. However, where the payees or indorsees are joint, i.e., Pay to A and B the negotiation is valid. In such a case, the instrument is indorsed in its entirety to both A and B, who can negotiate the instrument only by both their indorsements. The provision does not cover a situation where part of the amount of the instrument has been paid, in which case, it may be negotiated for the balance. Thus, in a note payable by installments, where some installments have been paid, the instrument may still be negotiated for the remaining unpaid installments Neither does the provision prohibit a transaction where the indorsee pays the indorser less than the face amount of the instrument, title transferring to the indorsee. This is what is called a discount of the instrument. The discount is given in consideration of the period during which the purchaser has to wait before he can cash the instrument with the maker or acceptor, which can be done only at the maturity of the instrument When an indorsement does not comply with Sec 32, the transfer is not necessarily void. It remains valid, not as a negotiation, but as a mere assignment which subjects the holder to all defenses on the instrument

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 The question as to when the indorsement on a separate paper called an allonge, may be valid, has given rise to much conflict. Although the law makes no distinction, the prevailing view follows the common law rule that an allonge can be validly used only when there is no longer any room on the instrument for further indorsements. He will be subject to defenses such as failure of consideration. A contrary rule would open the door to fraud Note that the law requires the allonge to be attached to the instrument. The Uniform Commercial Code is more specific and requires that the paper be so firmly attached affixed thereto as to become a part thereof b. in case of joint payees Where the instrument is payable or indorsed to A and B, they are joint payees and an indorsement by either A or B will not constitute a valid negotiation so as to free the instrument from defenses, unless one indorsing is authorized by the other. But where the instrument is payable to A or B, the payees are merely in the alternative, and either one may validly negotiate the same c. if name misspelled

Sec. 43. INDORSEMENT WHERE NAME IS MISSPELLED, AND SO FORTH. Where the name of a payee or indorsee is wrongly designated or misspelled, he may indorse the instrument as therein described, adding, if he thinks fit, his proper signature Under the above provision, the indorsement should be made by the holder in the manner he was designated, otherwise the signature will prima facie not be a valid indorsement of the instrument. After such indorsement, he may sign his correct name.

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Suppose that an instrument is on its face payable to bearer and it is specially indorsed thus: Pay to X (sgd) Y, is Xs signature necessary for the future negotiation of the instrument? Sec 34 taken alone would seem to answer this query in the affirmative. Sec 40 however offers the opposite result. This apparent conflict can be settled by applying Sec 40 only to original bearer instruments Illustration: A-------------------bearer B (no indorsement by B) C Pay to D (sgd.) C Pay to E (sgd.) D (no indorsement by E) Lies in the scope of liability assumed by the indorser For the presence or absence of express limitations put by the indorser upon the primary obligors privileges of paying the holder F A person who negotiates it by mere delivery is liable only to his immediate transferee. A special indorser however is liable to subsequent holders, unless the instrument is an originally bearer instrument, in which case he is liable only to those who takes title through his indorsement Applying these principles in the illustration: B is liable only to C and not to D, E, and F. C and D, the special indorsers, are not liable to F who does not take title through their indorsements. C is however liable to both D and E because they take title through his indorsement. D is liable only to E, since E is the only one who take title through his indorsement E is of course liable to F An indorsement in blank specifies no indorsee, and an instrument so indorsed is payable to bearer, and may be negotiated by delivery. Thus, where only the signature of the indorser appears, with no indication of the person to whom it is payable it is a blank indorsement, and the further negotiation of such an instrument may be effected by mere delivery regardless of whether the instrument is on its face payable to bearer or not. A blank indorsement is not as safe as a special indorsement. Being negotiable by mere delivery, a thief or finder thereof can give good title to a holder in due course A blank indorsement may be converted into a special indorsement by writing over the signature of the indorser in blank any contract consistent with the character of the

Sec. 33. KINDS OF INDORSEMENTS. An indorsement may be either special or in blank; and it may also be either restrictive or qualified or conditional a. basis of classification

Although the signature of the indorser is sufficient to constitute an indorsement, additional words may be added which may modify the rights of subsequent holders or the liabilities of the indorser Blank indorsement Where only the signature of the indorser appears Classification Blank or Special Purpose For future method of negotiation, whether by indorsement and delivery or by delivery alone For the kind of title transferred

Restrictive or Nonrestrictive Qualified or unqualified Conditional or Unconditional

b. special and blank indorsements Sec. 34. SPECIAL INDORSEMENT; INDORSEMENT IN BLANK. A special indorsement specifies the person to whom, or to whose order, the instrument is to be payable; and the indorsement of such indorsee is necessary to the further negotiation of the instrument. An indorsement in blank specifies no indorsee, and an instrument so indorsed is payable to bearer, and may be negotiated by delivery 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. 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 2 forms of special indorsement: Pay X or Pay X or order, followed by the signature of the indorser. An indorsement need not contain words of negotiability as long as these appear on the face of the instrument.

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liability to pay the instrument should the maker be unable to pay at maturity. He does not guarantee the solvency of the maker, but merely his legal title to the instrument. In the absence of clear and unmistakable language qualifying liability, an indorser will be liable on both his contracts. His liability cannot be limited by implication. Thus, words expressing assignment of title to the instrument cannot by implication exclude his second contract. Similarly, words guaranteeing the makers payment on maturity will not impliedly exclude the contract of sale or assignment d. conditional indorsement An indorser is liable to pay the instrument on two conditions: that due demand or presentment be made on the party primarily liable on the date of maturity, and that the latter fails to pay or, such presentment, a notice of dishonor be promptly sent to the indorser. Implied in all indorsements. A conditional indorsement is one where an additional condition is annexed to the indorsers liability. Necessarily, the condition must be express. Such an indorsement does not affect the negotiability of the instrument because the original promise or order remains unconditional. It is only the liability of the particular indorser which is conditional. But all holders subsequent to the conditional indorsement take subject to the condition Sec. 39. CONDITIONAL INDORSEMENT. Where an indorsement is conditional, a party required to pay the instrument may disregard the condition, and make payment to the indorsee or his transferee, whether the condition has been fulfilled or not. 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 indorsing conditionally. If an instrument on its face payable on December 1, 1995, is indorsed by the payee to A if he marries before he is 25, there is a valid but conditional indorsement. Should A not fulfill the condition, he or any holder after him cannot compel the maker to pay him on that date. However, the maker, if he chooses, may disregard the condition and pay the holder. Should he pay, A or the holder who received payment will hold the money subject to the rights of the conditional indorser. Thus, if A does not marry before hes 25, then A will have to deliver the money to the conditional indorser. If A should fail to deliver, the latter would have no right of action against the maker who paid before the fulfillment of the condition, because the maker is expressly

indorsement. Thus, the holder may write his name above the signature of the indorser in blank, thus converting the indorsement into a special one, rendering it negotiable by indorsement and delivery, unless it is upon an originally bearer instrument If a blank indorsement is followed by a special indorsement and the instrument is one which is payable to order on its face, the special indorsement controls, since under Sec 34 its further negotiation may be effected only by indorsement of the special indorsee. And as previously stated, Sec 40 will not apply, otherwise inconsistency between the two provisions will result. Furthermore, under Sec 9(e) it is no longer a bearer instrument because the last indorsement is not a blank indorsement. In short, an instrument payable to order on its face may be converted into a bearer instrument by means of a blank indorsement, and may later be reconverted into an order instrument by a subsequent special indorsement, the last indorsement always controlling the means of further negotiation. On the other hand, and instrument payable to bearer on its face always remain a bearer instrument, i.e., may be further negotiated by delivery alone, whether the last indorsement is a blank or special one. An indorsement of a bearer instrument does not convert it to an instrument payable to order. c. qualified indorsements

Sec. 38. QUALIFIED INDORSEMENT. A qualified indorsement constitutes the indorser a mere assignor of the title to the instrument. It may be made by adding to the indorsers signature the words without recourse or any words of similar import. Such an indorsement does not impair the negotiable character of the instrument. An indorser by his indorsement impliedly enters into two contracts: (1) a contract of sale or assignment of the instrument, and (2) a contract to pay the instrument if the maker is unable to pay on maturity. If he wants to relieve himself of either contract he must do so in clear and express terms. By adding the words without recourse above his signature, he expressly rids himself of the second implied contract. Words of similar import would include sans recourse, or at indorsees own risk. A qualified indorser becomes a mere assignor of the title of the instrument. But a qualified indorsement does not affect the negotiability of the instrument. The transfer would still be a negotiation and the transferee would still be a holder capable of acquiring a title free from defenses of prior parties.. the only effect of the qualified indorsement is to relieve the qualified indorser of his

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to collect. Other forms of this kind of restrictive indorsement are: Pay to X for my use, or Pay X for my account. (3) Pay to X for Ys use is a restrictive indorsement which vests the title of the indorsee in trust for or to the use of some other person. X may receive payment on the instrument and may sue thereon but whatever he collects he holds in trust or for the use of Y. He may also further negotiate the instrument but subsequent holders cannot acquire rights which will defeat the rights of Y. 7. indorsement to or by collecting agent

authorized to do so under Sec 39. His payment discharged him from liability on the instrument e. restrictive indorsement

Sec. 36. WHEN INDORSEMENT RESTRICTIVE. An indorsement is restrictive, which either: 1. prohibits the further negotiation of the instrument; or 2. constitutes the indorsee the agent of the indorser; or 3. vests the title in the indorsee in trust for or to the use of some other person But the mere absence of words implying power to negotiate does not make an indorsement restrictive Sec. 37. EFFECT OF RESTRICTIVE INDORSEMENT; RIGHTS OF INDORSEE. A restrictive indorsement confers upon the indorsee the right: 1. to receive payment of the instrument; 2. to bring any action thereon that the indorser could bring; 3. to transfer his rights as such indorsee, where the form of the indorsement authorizes him to do so But all subsequent indorsees acquire only the title of the first indorsee under the restrictive indorsement A restrictive indorsement either restricts the right of the indorsee to further negotiate the instrument or reserves beneficial interest therein in the indorser or in the third person. In the latter case, although the instrument may be further negotiated, all subsequent indorsees take subject to the rights of the restrictive indorser or the third person, as the case may be. Illustration of the 3 cases: (1) Pay to X only. This prohibits entirely the further negotiation of the instrument. Full title however passes to X who can receive payment of the instrument and bring any action thereon which the indorser could bring Pay to X without any words, is not a restrictive indorsement (2) Pay to X for collection constitutes the indorsee an agent to collect in behalf of the indorser. X may receive payment on the instrument and may sue thereon in his own name. Such indorsement does not pass title, nor deprive the maker of any defense he may have otherwise on the note. The restrictive indorsee may negotiate. However, no subsequent holder can acquire any right in the instrument antagonistic to the right of the first restrictive indorser for subsequent indorsees acquire only the title of the first indorsee under a restrictive indorsement. They merely become sub-agents

A holder of a check may either cash it with the drawee bank, or may deposit to his credit wether in the drawee bank or in another bank. Should he cash or deposit it with the drawee bank, then payment or credit to him by the latter would discharge the instrument and terminate all rights and liabilities of the parties thereto. Where the holder deposits the check with a bank other than the drawee bank, he would in effect be negotiating the check to such bank, since he would have to indorse the check before the bank will accept it for deposit. If the indorsement is for collection, we have seen that this is a restrictive indorsement where the bank is merely an agent for collection. If the indorsement states for deposit, what is in effect on the indorsers relationship with the bank? There has been much controversy about this matter. Some courts have held this to be a restrictive indorsement because it merely makes the bank an agent to collect the funds and credit them as deposit to the customers account from the moment of collection. Other courts have considered the indorsement as nonrestrictive, treating the transaction as a purchase of the check by the bank in cash and a deposit of such cash to the credit of the depositor. In most cases, whatever kind of indorsement is made by the holder, the bank is in fact a collecting agent. As a rule, the indorsement made by the depositor of a check would be in blank, just his signature without any other words, thus no restrictions whatsoever. However, the deposit slip which the depositor fills up in making the deposit will usually state that the bank is a mere collecting agent, thus its effect on a for deposit indorsement would be the same. In forwarding negotiable instruments for collection, banks customarily use the indorsement Prior indorsements and/ or lack of indorsements guaranteed. According to one view, this type of indorsement is nonrestrictive and does not prevent the holder from acquiring an unlimited title. But if in a deposit slip filled up by the holder, a provision similar to the one quoted

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then should the instrument be further negotiated, it should be indorsed in the following manner: Pay to X Manila Book Co. By A assuming that A has implied or express authority to sign for the partnership if one of several joint payees or joint indorsees indorses his own name and, without authority from his co-obligee, indorses the latters name and delivers the instrument to a purchaser, such transaction does not constitute a negotiation of the instrument. But it has been held that one of two joint payees, by indorsement and delivery of the instrument to his co-payee, may transfer full title to the latter. Where the instrument is payable to the alternative payees, i.e., A or B, either one in possession of the instrument is the holder. The ultimate ownership of the fund as between the parties is not controlled by the form of the indorsement 9. unindorsed instruments

above appears, the bank would still be only a collecting agent. However, with respect to the drawee bank to which it has forwarded the check for payment, it has guaranteed the validity of all prior indorsements as well as the lack of any necessary indorsement. Thus, if the collecting bank received the check from a forger, it has to return to the drawee bank whatever collected from the latter. In some cases, the words For Payees account only are written on the left-hand corner of the face of the check. This means that the check should be deposited in a bank in which the payee has an account. The payee will have to indorse the check, and although his indorsement may not necessarily state that it is for collection, again, here, the bank would in effect be a mere collecting agent. 8. negotiation by joint or alternative payees or indorsees

Sec. 41. INDORSEMENT WHERE PAYABLE TO TWO OR MORE PERSONS. Where an instrument is payable to the order of two or more payees or indorsees who are not partners, all must indorse, unless the one indorsing has authority for the others Under Sec 8(d), an instrument is negotiable which is payable to the order of two or more payees jointly. Under Sec 8(e), an instrument is negotiable which is payable to the order of one or some several payees. If an instrument is payable to the order of A and B, either as payees or indorsees, both must indorse in order for the transaction to operate as a negotiation. A and B will then be jointly and severally liable and action will lie against any of them individually. If only one of them indorses, his indorsee can have no right of action on the instrument because this would be violating the rule against splitting of actions Under Sec 41, if the joint payees or joint indorsees are partners, then the indorsement by one of the partners of his own name and that of his partner, who is a co-payee or joint indorsee with him, may constitute an indorsement by each of them, and thus effect a valid negotiation. Unlike common law concept, our civil law concept of partnership as a juridical person which has personality distinct and separate from the partners composing it. Thus, if an instrument is intended to be negotiated to A and B as partners doing business under the firm name Manila Book Co., then the indorsement must name such firm and not A and B as joint payees or indorsees. Otherwise, if the latter is done, then the proceeds belong to A and B and not to the partnership, and any further negotiation, must be signed by both A and B, even if they are partners, unless of course one authorizes the other to sign for him. But if indorsement is made as it should be, i.e., Pay to Manila Book Co.,

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 If his predecessor had legal title, the transferee of unendorsed instrument acquires as such, subject however to the defenses and equities available among prior parties. This, he has the right to sue in his own name, but he cannot be considered a holder of the instrument since he is neither a payee nor indorsee, nor is he a bearer because the instrument is not payable to bearer. Presumption of ownership does not vest, hence, he has to prove that he is the owner of the instrument as a condition precedent to his right to introduce the instrument in evidence to recover thereon. It is an exception rather than the rule for payee of an order instrument or a special indorsee to transfer the instrument without indorsement, and since the situation is abnormal, it is only fair for the holder to prove ownership But the transferee of an unendorsed instrument may become a holder obtaining the indorsement of his

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indorsement? Obviously not because it is necessary to his title. Suppose the instrument is further negotiated and the following indorsements follow the former ones: Pay to D (sgd.) C Pay to E (sgd.) D May E, the holder, cancel the indorsements of C and D? It has been held that in such cases the last indorsee may strike out all indorsements subsequent to the blank indorsement and sue as holder under the blank indorsement. It is however submitted that this ruling is inconsistent with the NIL. First of, the indorsement of a special indorsee is necessary for future negotiation of the instrument. Ds indorsement is necessary for a valid negotiation to E. he can therefore not strike out Ds indorsement, Second of, in an order instrument the last indorsement controls the method of future negotiation. Although in the hands of C it was payable to bearer because of Bs blank indorsement, Cs special indorsement to D converted the paper to an order one, making Ds indorsement necessary to Es title. Suppose the instrument is still in Ds hands after Cs indorsement to him, may D cancel Cs indorsement? It is submitted that he may because it is not necessary to his title. He is in a different situation from E as a holder after Ds special indorsement, following Cs special indorsement. Cancellation of indorsements would be proper in order instruments where the instrument, after several negotiations, is indorsed back to a previous indorser. To illustrate Pay to B (sgd.) A Pay to C (sgd.) B Pay to D (sgd.) C Pay to E (sgd.) D Pay to C (sgd.) E C, the reacquirer, may strike out his own indorsement as well as those of D and E. As a prior party, he cannot have any rights against those to whom he is liable under his indorsement to D. Their indorsements are therefore not necessary to his title.

transferor. It is only at this time that the instrument can be considered as having been negotiated. Note that this section applies only to an instrument payable to the order of the transferor, i.e., where he is either the specified payee or a special indorsee of an order instrument. It cannot apply to bearer instruments Some cases have held that a gratuitous transferee of an unindorsed instrument does not acquire title to the instrument because Sec 49 speaks of a transferee for value. Most authorities however have the contrary view, since, according to them, a negotiable instrument being a species of property is a proper subject of gift by negotiation. There can be no apparent reason therefore why an unendorsed instrument should not also be the subject of gift passing title to the donee. However, such a donee, although he has a right to sue on an instrument as a legal owner thereof, does not have a right to compel the indorsement of his donor. This is the only difference in the effect which Sec 49 should have on a gratuitous transfer as contrasted with the transfer for value 10. cancellation of indorsements Sec. 48. STRIKING OUT INDORSEMENTS. The holder may at any time strike out any indorsement which is not necessary to his title. The indorser whose indorsement is struck out and all indorsers subsequent to him are thereby relieved from liability on the instrument A holder must be able to trace his title to the instrument back to the original owner, the payee. If the instrument is payable to bearer on its face, then whether or not there are indorsements on the back of the instrument would be immaterial to the title of the bearer, who is presumptively the owner and holder by his mere possession of such instrument. None of the indorsements would be necessary to his title since mere delivery would have been sufficient to transfer title from one holder to another. The holder would thus have the right to cancel any or all indorsements. Should he do so, then any indorser whose signature is cancelled and all indorsers subsequent to him would be discharged from liability on the instrument Where the instrument is payable to order on its face, the situation is different. If all the indorsements appearing on the back of the instrument are special, then all of them would be necessary to the holders title. Suppose that the indorsements are as follows: Pay to B (sgd.) A (sgd.) B C is the holder of the instrument to whom B negotiated it by means of his blank indorsement. May C cancel Bs

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corporation, in which case his personal indorsement would be the proper one. The word corporation in Sec 42 does not include cities and towns and confers no authority upon the town treasurer to impose upon his town the liability of an indorser, although an instrument payable to the Treasurer of the town of X in legal aspects stands on the same footing as if payable to the town which is the real payee 13. continuation of negotiable character Sec. 47. CONTINUATION OF NEGOTIABLE CHARACTER. An instrument negotiable in its origin continues to be negotiable until it has been restrictively indorsed or discharged by payment or otherwise. A negotiable instrument, although overdue, retains its negotiability unless it has been paid or restrictively indorsed so as to prohibit further negotiation. Other forms of restrictive indorsements do not destroy negotiability, for Sec 37 recognizes the right of the restrictive indorsee to further negotiate the instrument. The fact that the instrument is overdue does not affect the right of the holder to further it if he wishes to, but merely prejudices the status of subsequent holders as they cannot be considered holders in due course Chapter 3: Holder in Due Course Sec. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE. A holder in due course is a holder who has taken the instrument under the following conditions: 1. that it is complete and regular upon its face; 2. that he became a holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact; 3. that he took it in good faith and for value; 4. that at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it, These four requisites must concur for a holder to be a holder in due course 1. rights of a holder in due course Sec. 57. RIGHTS OF A 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

Sec. 44. INDORSEMENT IN REPRESENTATIVE CAPACITY. Where any person is under obligation to indorse in a representative capacity, he may indorse in such terms as to negative personal liability An instrument may be indorsed either personally or through an agent. And the authority of the agent need not be in writing. In so signing, an agent should make it plain that he is merely signing in behalf of the principal, otherwise he may be held personally liable. The most common form of indorsement by an agent is Annabelle San Roque by Pedro Rodriguez, agent 12. presumption as to indorsements Sec. 45. TIME OF INDORSEMENT; PRESUMPTION. Except where an indorsement bears date after the maturity of the instrument, every negotiation is deemed prima facie to have been effected before the instrument is overdue Sec. 46. PLACE OF INDORSEMENT; PRESUMPTION. Except where the contrary appears, every instrument is presumed prima facie to have been made at a place where the instrument is dated Although indorsements after maturity are good to transfer title, they prevent a holder from becoming a holder in due course, thus subjecting him to defenses, if any. The presumption that every negotiation was effected before the instrument was overdue is therefore significant, since indorsements are usually not dated The law of the place of dating will govern any controversy should there be a conflict of laws Sec. 42. EFFECT OF INSTRUMENT DRAWN OR INDORSED TO A PERSON AS CASHIER. Where an instrument is drawn or indorsed to a person as cashier or other fiscal officer of a bank or corporation, it is deemed prima facie to be payable to the bank or corporation of which he is such officer and may be negotiated by either the indorsement of the bank or corporation, or the indorsement of the officer When an instrument is intended for a corporation, it is usually issued or indorsed in its name, i.e., Pay to ABC Corporation. Sometimes, the indorsement or designation of payee is made to the fiscal officer of the corporation, thus, Pay to Cashier, ABC Corporation or ABC Corporation, by Pedro Rodriguez, Cashier. Assuming the authority of Pedro Rodriguez to indorse for the Corporation, such indorsement would bind it. Pedro Rodriguez may however prove that the instrument was intended for him personally and not for the

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Sec. 25. CONSIDERATION; WHAT CONSTITUTES. Value is any consideration sufficient to support a simple contract. An antecedent or preexisting debt constitutes value; and is deemed such whether the instrument is payable on demand or at a future time One of the requisites for due course holding is that the holder took the instrument for value. Sec 25 tells us what constitutes value. Value and consideration are generally convertible terms A negotiable instrument may be given as a gift to the indorsee or transferee. In such cases, whatever defenses can be set up against the transferor can also be set up against the transferee. But where the holder gave valuable consideration for the note and the other requisites of Sec 52 are present, he will be free from such defenses Value need not be full and a holder will be one for value even if he gave less than the face value of the instrument, provided that intention of the transferor is to transfer the full amount represented by the instrument b. bank credit for value When the holder of a check deposits it with his bank (assuming it is not the drawee bank) and the bank credits it to his account, is the bank at this stage a holder for value? Most courts hold that it is not on the theory that the bank parted with nothing and that the crediting is a mere bookkeeping entry. The bank becomes a holder for value only when the depositor withdraws the amount of the deposited instrument. And where such withdrawal takes place before maturity and before the bank receives notice of any defense on the instrument, the bank is a holder in due course against whom such defense would be unavailable But how can one determine whether the funds represented by the deposited instrument have been withdrawn? This question becomes significant where there has been a continuous flow of deposits and withdrawals by the depositor. Most courts follow the rule that the first money in is presumed to be the first money paid out. A minority of the courts have ruled that as long as the balance in the depositors account equals or exceeds the amount of the instrument deposited, the latter cannot be considered as withdrawn for the purpose of treating the bank as a holder for value c. what constitutes a holder for value

Sec. 58. WHEN SUBJECT TO ORIGINAL DEFENSES. 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 These provisions indicate the significance of due course holding. A holder in due course can acquire a better title than his predecessors because he takes the instrument free from any defect of title of prior parties. He is furthermore free from defenses available to prior parties among themselves. A holder not in due course, on the other hand, operates as a transferee or assignee subject to defenses. Real defenses, however, which attach to the instrument itself would be available even against a holder in due course Real defenses are the following: F2EU ADM2 WIWI forgery fraud in factum between public enemies ultra vires acts of a corporation alteration (material) duress amounting to forgery minority marriage want of authority incapacity of parties want of delivery of an incomplete instrument illegality of contract The fact that a holder is not in due course will in no way affect the negotiability of the instrument. It only affects such holders rights, and does not necessarily prevent subsequent holders from acquiring the status of due course holders. It should be kept in mind that the question of whether a holder is a holder in due course or not is significant only when there is an existing defense between prior parties. If there is no such defense and the instrument is completely valid, then it will not matter whether the holder lacks one or more of the requisites of Sec 52. For instance, even if the holder took the instrument after maturity, the maker thereof cannot refuse to pay on the ground alone, unless he has a defense against the original payee, like fraud or failure of consideration. 2. holder for value a. what constitutes value

Sec. 24. PRESUMPTION OF CONSIDERATION. Every negotiable instrument is deemed prima facie to have been issued for valuable consideration; and every person whose signature appears thereon to have become a party thereto for value

Sec. 26. WHAT CONSTITUTES A 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 became such prior to that time

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Whether or not the words for value received appear in an instrument is immaterial. In their absence, the presumption fills in the gap. On the other hand, their presence will not preclude evidence to show lack of consideration. The presumption is prima facie and may be rebutted by proof to the contrary. 3. holder in good faith One of the important requisites of due course holding is that the holder must have taken the instrument is good faith and that at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. Note that due course holding is not affected by the holders acquisition of knowledge after he has taken the instrument Sec 55. WHEN TITLE DEFECTIVE. The title of a person who negotiates an instrument is defective within the meaning of this Act when he obtained the instrument, or any signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith, or under such circumstances as amount to a fraud Sec 56. WHAT CONSTITUTES NOTICE OF DEFECT. To constitute notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounts to bad faith Under Sec 56, in order to constitute notice, the holder must have actual and not merely constructive knowledge of the defect, or he must have acted in bad faith. Gross negligence in itself would not constitute notice since it is not the equivalent of bad faith nor of actual knowledge. Anything short of either actual knowledge or bad faith, therefore, will not constitute notice. a. notice; bad faith; effect of suspicious circumstances

If A issues a note to B, the payee, without consideration and B indorses it to C also without consideration, and C indorses it to D who gives value to C, D is a holder for value not only as regards C, but also as regards A and B. Likewise, if A assigns a note in favor of B without consideration and B negotiates it to C for value, and C in turn negotiates it to D by way of gift, D is a holder for value within the meaning of this section, as against A and B, but not as against C. d. where holder has a lien on the instrument Sec. 27. WHEN LIEN ON INSTRUMENT CONSTITUTES HOLDER FOR VALUE. Where the holder has a lien on the instrument, arising either from a contract or by implication of law, he is deemed a holder for value to the extent of his lien If a negotiable instrument is given as collateral for a debt, the debtor has a lien on the instrument. If the amount called for by the instrument is less than the principal debt secured by such instrument, the pledgee is a holder for value for the full amount and may therefore recover all. If the debt secured by the instrument is less than the sum for which the instrument is issued, and there are no existing defenses, the pledgee can still recover all, but the excess over the debt he holds in trust for whomsoever is entitled to it. He is a holder for value only to the extent of his lien and should, therefore, be entitled only to the amount of the debt, but since this would be against the general rule against splitting the cause of action under Sec 32, the pledgee is allowed to recover all, holding the excess merely as a trustee. However, if the secured debt is less than the amount of the instrument but there is no knowledge, he is a holder in due course but since he is a holder for value only to the extent of his lien, he can recover only the amount of the debt The above principles should not be confused with the rights of a purchaser who buys the instrument at a discount. Such purchaser is entitled to recover the full amount although he paid less for the instrument e. burden of proof

Sec. 24. PRESUMPTION OF CONSIDERATION. Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears thereon to have become a party thereto for value. Sec 28 goes further and provides that absence or failure of consideration is a matter of defense as against any person not a holder in due course.

Although the test established by Sec 56 is subjective, bad faith, being a state of mind, can only be proven by circumstantial evidence To require investigation of every suspicious circumstance as is usually done in the sale of land for example, would hamper their function of facilitating exchange. Thus, negligence in tracking down a suspicious circumstance which would put a prudent man on inquiry is not of itself sufficient to prevent recovery, although it may properly be admitted, together with other circumstances as evidence of bad faith. But where the suspicious circumstances are so cogent and obvious, that

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See case: Consolidated Plywood Industries, Inc., et al. v IFC Leasing and Acceptance Corporation No. L-72593, April 31, 1987; 149 SCRA 448 See case: Salas v. CA G.R. No. 76788 January 22, 1990, 181 SCRA 296 c. effect of purchase at a discount

to remain passive would amount to bad faith, the holder will be subject to defenses. There is a difference between the existence of suspicious circumstances and actual suspicion of the purchaser. In order to show that the defendant had knowledge of such facts that his action in taking the instrument amounted to bad faith it is not necessary to prove that the defendant knew the exact fraud that was practiced upon the plaintiff by the defendants assignor, it being sufficient to show that the defendant had notice that there was something wrong about his assignors acquisition of title, although he did not have notice of the particular wrong that was committed. It is therefore sufficient that the buyer of a note had notice or knowledge that the note was in some way tainted with fraud. It is not necessary that he should know the particulars or even the nature of fraud, since all that is required is knowledge of such facts that his action in taking the note amounted to bad faith Bad faith may be imputed from knowledge of the purchaser of other suspicious transactions of the transferor See case: Vicente R. De Ocampo & Co. v. Gatchalian, et al. No. L-15126, November 30, 1961; 3 SCRA 596 See case: State Investment House v. IAC, et al. G.R. No. 7276, July 13, 1989; 175 SCRA 310 b. financing company not a holder in good faith as to buyer In installment sales, the buyer usually issues a note payable to the seller to cover the purchase price. Many times a finance company pays the full price of the property sold and the note is indorsed to it by the seller, subrogating it to the right to collect the price from the buyer. In such cases, the tendency of the court is to protect the buyer against the finance company in the event the goods sold turn out to be defective. The finance company will be subject to the defense of failure of consideration and cannot recover the purchase price from the buyer. Reason for this rule: protection for the general buying public; finance companies are better able to bear the risk of the dealers insolvency than the buyer and in a far better position to protect his interests against unscrupulous and insolvent dealers Although in the recent case of Consolidated Plywood Industries, Inc., et al. v IFC Leasing and Acceptance Corporation, the Supreme Court cited with approval the above view, in the later case of Salas v. CA, et al, it did not apply the said rule

The purchase of an instrument at a discount does not, of itself, constitute bad faith. This is so because in most cases a purchaser at a discount is influenced by the financial condition of the issuer of the instrument rather than by the possibility that it was obtained subject to a defense. However, if the instrument is purchased at a heavy discount, this fact together with other facts, may be taken into account in deciding the issue of purchase in good faith. Thus, where the note is offered at a large discount though the maker is known to be solvent, or the note is amply secured, or is taken from a total stranger, this additional circumstances taken with the fact of a heavy discount, might prove bad faith d. effect of notice before full payment Sec. 54. NOTICE BEFORE FULL AMOUNT PAID. Where the transferee receives notice of any infirmity in the instrument or defect in the title of the person negotiating the same before he has paid the full amount agreed to be paid therefore, he will be deemed a holder in due course only to the extent of the amount theretofore paid by him Notice of defenses to a purchaser before he has acquired title and before he has paid any portion of the purchase price is fully operative to prevent him from being a holder in due course. But where he receives such notice after he has partially paid the instrument, he is a holder in due course as to such amount paid by him. Should he pay the remainder despite the notice he cannot thereafter recover such amount from the maker because to that extent, he will be subject to the defenses which the maker may have. The term paid in Sec 54 includes any performance by the purchaser of the instrument. However, it applies only where the obligation incurred by the holder of the note or bill is such that, on discovering the infirmity thereof, he is relieved from all further legal obligations to make further payment. It does not apply where the holder has given for the instrument a promise which he must perform, in which case he would be in the same position as one who had paid money or property at the time of the transfer. To illustrate (where Sec 54 not applicable): Andoy issues a note payable to the order of Inna. Inna wants to borrow money from Colleen who is willing to lend her only if Inna gets Lori to condition that Inna indorse to her Andoys note as collateral. So Inna

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4. complete and regular Under Sec 52(a) in order that a holder may be considered a holder in due course, he must have taken the instrument complete and regular on its face. If a purchaser of a negotiable paper takes prior to completion or contemporaneously with the act of completion, he is not a holder in due course. Mere failure to affix revenue stamps as required by law does not render the instrument incomplete. An instrument payable within days after date is not complete and regular on its face. Neither is it complete where it specifies the date but not the year of maturity, or where it is blank as to the payee, although the holder can sue on said instrument without filling in the payees name. Where the instrument is executed in blank and is subsequently filled up and issued to the first holder who has no knowledge of the execution in blank, the holder is a holder in due course. However, if the first holder takes the instrument complete in the form with knowledge of the original execution in blank, he is not a holder in due course, although he actually took it as complete. Moreover, the taking of an incomplete instrument, according to the prevailing view, lets in all defenses and equities, whether or not connected with the execution in blank. These last two rules seem to be inconsistent with the general principle that as purchaser of a negotiable instrument is not put on inquiry and is not charged with knowledge of such additional facts as a reasonable inquiry would disclose. However, both rules are supported by the majority view. A similar rule has been adopted with respect to irregular instruments. A purchaser who takes an instrument irregular on its face is not a holder in due course and is subject not only to defenses and equities related to the irregularity involved, but also to those which have nothing to do with such irregularity. The most common type of irregularity is an alteration which is apparent on the instrument. The effect of a material alteration is governed by Sec 124 which provides: Sec. 124. ALTERATION OF INSTRUMENT; EFFECT OF. Where a negotiable instrument is materially altered without the assent of all parties liable thereon, it is avoided, except as against a party who has himself made, authorized or assented to the alteration and subsequent indorsers. But when an instrument has been materially altered and is in the hands of a holder in due course, not a party to the alteration, he may enforce payment thereof according to its original tenor. If the alteration is apparent on the face of the instrument, it renders the instrument irregular within Sec 52(a), even if the change may have been authorized or assented to by

indorses Andoys note to Lori. When Andoys note falls due, Andoy refuses to pay Lori on the ground that Inna was guilty of fraud in procuring the note. Subsequently, Loris and Innas note in favor of Colleen falls due and since Inna has defaulted, Lori has to pay full amount to Colleen. Naturally, Lori wants to recoup her loss by demanding payment from Andoy of the first note. Andoy invokes Sec 54. Lori cannot be covered by this section because when she signed the note in favor of Colleen, she had become unconditionally obligated to the latter to pay the note when due and cannot be released from such obligation by the mere fact that the collateral he got from Inna turned out to be a result of fraud. At the time Lori received the notice of the fraud, she had already given full value for Andoys note. She had become a holder in due course of Andoys note at the time it was negotiated to her by Inna. Lori can thus recover from Andoy. e. constructive notice not sufficient

Just as a purchaser of a negotiable instrument is not put to inquiry, neither is he charged with notice of defenses or equities disclosed by public records, nor is he affected by the doctrine of lis pendens. However, notice to an agent is chargeable against the principal. f. notice of accommodation not notice of defect

Sec. 29. LIABILITY OF ACCOMMODATION PARTY. An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefore, and for the purpose of lending his name to some other person. Such person is liable on the instrument to a holder for value, notwithstanding such holder at the time of taking the instrument knew him to be only an accommodation party An accommodation party is actually a surety for the principal debtor, the accommodated party to whom the name is lent. To illustrate: Andoy wants to borrow money from Inna, who is willing to lend him if Colleen signs a note with Andoy in favor of Inna. Colleen if she agrees to do so, is an accommodation co-maker. Let us suppose that Inna indorses the note to Lori, who knows that Colleen was merely an accommodation maker but who otherwise has all the requisites of Sec 52. Upon maturity, Colleen cannot refuse to pay Lori on the ground that Lori knows her to be a mere accommodation party. The fact that the holder knew of such fact does not prevent her from being a holder in due course. In other words, Loris title is not rendered defective by her knowledge that the party sought to be charged or held liable was an accommodation party.

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If the instrument is payable after sight, the date of maturity is fixed by the date of presentment. If the instrument is payable on the occurrence of a specified event certain to happen, the date of maturity is fixed by the happening of the event. Sec. 53. WHERE PERSON NOT DEEMED HOLDER IN DUE COURSE. Where an instrument payable on demand is negotiated an unreasonable length of time after its issue, the holder is not deemed a holder in due course If the purchase of a demand instrument is made outside of the reasonable time after issue, the purchase is one of an overdue instrument. As to what constitutes reasonable time, Sec 193 provides that regard is to be had to the nature of the instrument, the usage of trade and business with respect to such instrument and the facts of the particular case. With respect to the nature of the instrument, it is the function of the instrument which must be noted in determining whether reasonable time has elapsed or not. As a general rule, demand notes are intended to circulate longer than checks. Demand bills of exchange would run for a period of time longer than checks but possible not as long as demand notes. Demand certificate of deposit, although in form of promissory notes, are primarily investment papers and would therefore circulate for a period much longer than demand notes. Evidence as to usage of trade or business is admissible to show lapse of reasonable time, and it is not sufficient that such usage is general but it should also be local in the sense that it may not be the same in all localities. The facts of the particular case will obviously vary in each case. The payment of interest may be an important factor in determining reasonableness of time. With respect to instruments with a fixed maturity but subject to acceleration, either automatically or at the option of the holder, the ultimate date of maturity is the date of maturity for the purpose of determining whether a purchaser is a holder in due course, unless such purchaser had knowledge of the earlier maturity at the time he acquired title. Thus, if an instrument is payable in 10 equal annual installments, subject to acceleration if any installment is not paid when due, the date of maturity for the purpose of determining due course holding is at the end of the ten-year period. Under Sec 45, the negotiation of the instrument through an undated indorsement establishes prima facie that it was negotiated before it was overdue, and one who denies that the holder of such instrument is a holder in due course has the burden of proving his allegation

all the parties concerned. And this puts the purchaser on inquiry as to all defenses and equities, whether or not connected with the alteration. If the unauthorized alteration is both apparent and material, then not only is the holder deprived of the rights of a holder in due course, but the instrument is entirely void, and is a real defense against enforcement. In form, the requirement of completion and regularity on the face of the instrument is separate and distinct from that of the general good faith rule. Actually, they deal with the same question, the only difference being that Sec 52(a) deals with matters evidencing bad faith which are to be found on the instrument, while Sec 52(c) and (d) and Sec 56 deal with issues of bad faith where the evidence thereof is not on the face of the instrument, but lies in extrinsic circumstances. In speaking of Sec 52(a), the court talks about the purchaser being put on inquiry as to all defenses and equities. But in dealing with Sec 52(c) and (d) and Sec 56, the courts state that the general rule that the purchaser is put on inquiry does not apply to negotiable paper because it would hamper to the main function of such kind of instruments. It has been suggested that Sec 52(a) should be interpreted as subordinate to Sec 52(c) and (d), so that a purchaser will be deemed not a holder in due course only if the instrument is so incomplete and irregular that the purchaser must have had actual knowledge of such facts that his action taking the instrument amounted to bad faith. 5. holder at or after maturity without notice of dishonor Under Sec 52(b), a holder in order to be a holder in due course must become a holder of the instrument before it is overdue and without notice that it has been previously dishonored if such was the fact. The fact that the instrument is overdue is a strong indication that it was dishonored and the law puts the potential holder on inquiry as to whether it was dishonored and the reason therefore. An instrument may be dishonored either by nonacceptance or by non-payment. Dishonor by nonacceptance can refer only to a bill of exchange and this takes place when the drawee refuses to accept the order of the drawer as stated in the bill. This may occur even before the date of maturity of the bill. Thus, it is possible for a bill to be dishonored even before its maturity. On the other hand, dishonor by non-payment occurs at the time of maturity when the party primarily liable, i.e., the maker of a note, or the acceptor of a bill, fails to pay the instrument at the date of maturity. In this connection, it should be noted that an instrument is not overdue on the day of its maturity.

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has been dishonored for lack or insufficiency of funds shall be prima facie evidence of deceit constituting false pretense or fraudulent act 7. effect of qualified, conditional and restrictive indorsements The status of a holder as a holder in due course is not affected by his taking under a qualified indorsement. The fact that the previous holder indorsed without recourse merely means that he does not want to assume the full liability of a general indorser perhaps because he may have doubts as to the solvency of the primary party. It does not necessarily imply that there is a defect in the instrument or in the title of any prior party. If there should be any such defect and the holder under a qualified indorsement did not know about it, and took the instrument for value, in good faith and before it was overdue, he would be free from any defense based on such defect Neither does a conditional indorsement by itself deprive the conditional indorsee or any subsequent holder of the rights of a holder in due course. If he fulfills all the requisites of Sec 52, he will be immune to all personal defenses between prior parties. The fact that a condition is imposed on the indorsee does not necessarily mean there is some defect of title or infirmity in the instrument. It merely subjects him to the rights of the conditional indorser should he receive payment before the condition is fulfilled. A restrictive indorsement which prohibits further negotiation, as Pay to A only, will not prevent the indorsee from being a holder in due course. However, should he violate the prohibition and indorse the instrument to another, then the latter cannot be a holder in due course. First of all, there is no valid negotiation, and thus, the transferee cannot even be a holder. Secondly, the restrictive indorsement serves as a notice to any prospective purchaser of the instrument of the prohibition to negotiate. A restrictive indorsement which constitutes the indorsee as an agent of the indorser can vest the former with the rights of a holder in due course, if his principal, the restrictive indorser, is a holder in due course. If the principal is not a holder in due course, neither is the restrictive indorsee, since he is merely and agent of the indorser. Should such indorsee sue the maker for the payment on a note, he will be immune from the personal defenses if his principal was a holder in due course. If he was not, then the indorsee-agent will be subject to all defenses. Any subsequent holder from the indorseeagent will have the same rights as the latter. But such subsequent holder can never acquire rights which are antagonistic to the indorser-principal, for he is merely a sub-agent of the latter

The fact that a purchaser after maturity is not a holder in due course should not however be misunderstood to mean that the instrument is void in his hands or that the same can no longer be negotiated. After maturity, an instrument remains negotiable and may pass from hand to hand ad infinitum until it is paid, since an instrument continues to be negotiable until discharged or restrictively indorsed. It retains its commercial attributes. The main distinction lies between the rights of a transferee before and of a transferee after maturity. The purchaser after maturity takes the instrument subject to all defenses and equities with which it was encumbered in the hands of his transferee. In other words, he acquires nothing but the actual right and title of the transferor. And if the transferors title is not defective, neither is his. 6. effects of postdating or antedating If an instrument bears a date earlier than the date of its actual issuance, it is said to be antedated. If it contains a date later than the date of its issuance, it is postdated. Sec 12 provides: Sec. 12. ANTEDATED OR POSTDATED. The instrument is not invalid for the reason only that it is antedated or postdated, provided this is not done for an illegal or fraudulent purpose. The person, to whom an instrument so dated is delivered, acquires the title thereto as of the date of delivery. This section has been held to mean that the instrument is not only valid but also negotiable though it be antedated or postdated. A holder thereof can therefore be a holder in due course, and he is not put on inquiry by the mere fact of its being antedated or postdated. A postdated check is payable either at the fixed or determinable future time specified therein, or if no time of payment is expressed, on demand or on after the date of the instrument. Thus, a bank has no right to debit the amount of a postdated check against the depositors account before the date of the check An instrument which is antedated in order to evade the effects of the Usury law is illegal under this section. If a drawer postdates his check in payment of an obligation without having sufficient funds in the bank, he may be guilty of estafa Sec. 2(d) of RA 4885 amending Article 315 RPC provides that the following act would constitute swindling or estafa: by postdating a check or issuing a check for payment of an obligation when the offender had no funds in the bank, or his funds deposited therein were not sufficient to cover the amount necessary to cover his check within three days from receipt of notice from the Bank and/ or the payee or holder that said check

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(3) A draws a check blank as to payees name, and gives it to his agent with instructions to fill in the name of B as payee and to deliver it to him. The agent instead fills in Cs name and delivers the check to C who takes it for value and without notice. C is free from As defenses

Where the restrictive indorsement vests title in the indorsee in trust or for the use of another, question has arisen as to whether the restrictive indorsee may be a holder in due course and acquire rights superior to those possessed by the restrictive indorser. Sec 47 provides: An instrument negotiable in its origin continues to be negotiable until it has been restrictively indorsed or discharged by payment or otherwise. A few cases have held that under this section as well as under Sec 37(b) a restrictive indorsee for the benefit of a third party cannot be a holder in due course as regards defenses to which the restrictive indorser was subject. To this, some learned writers disagree, mainly on the ground that the negotiability of an instrument is affected only to such extent as the restrictive indorsement warrants. According to this view, all that Sec 47 means is that after a restrictive indorsement, all subsequent indorsees take subject to the rights created and disclosed by the indorsement. To this extent its negotiability has been interfered with, but not otherwise. Thus, a restrictive indorsee who holds the instrument in trust for a third person can be a holder in due course, regardless of the status of the restrictive indorser. This seems to be a better view 8. payee as holder in due course Whether or not a payee can be a holder in due course is a question which has been given rise to much conflict. Although normally a payee cannot be a holder in due course because he has dealt directly with the maker or drawer and this must have knowledge of facts which may create a defense, there may be circumstances under which he is insulated from the maker or drawer by a third party, such as a remitter. If he meets the requirements of Sec 52, the weight of authority considers him a holder in due course. Instances where the payee may not have dealt directly with the maker or drawer: (1) A in Manila buys goods from B in Davao. He obtains a bank draft payable to B and sends it to B who takes it for value, in good faith, and without notice. The drawer bank would be liable to payee-seller B despite any defense which it may have against the remitter-buyer A A induces B through fraud to sign with him as a co-maker of a note payable to C, to whom it is delivered by A contrary to the authority given by B. if payee C took it with the requisites of Sec 52, he is protected from the defenses of B

The main center of discussion between the opposing views is the requirement of negotiation to the payee by a third person in the ordinary course of business. The proponents of the negative view believe that the rights of a holder in due course may be acquired only by negotiation. A payee, according to this view, acquires not by negotiation because the instrument is not indorsed but issued to him. Therefore, he cannot be a holder in due course. Professor Brannan answers his argument by relying mainly on the definitions of holder and negotiation given by the law. Holder under Sec 191 includes a payee. On the other hand, Sec 30 provides that an instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof. The law uses the word person and not holder in referring to the transferor, so that negotiation is not limited to a transfer by a holder, but may include a transfer by the maker or drawer. And since holder includes a payee, then a transfer from constitutes a negotiation. The last sentence of Sec 30 which says if payable to order it is negotiated by the indorsement of the holder completed by delivery should be understood to apply to a negotiation after the instrument has come into the possession of the payee or other holder. Our Supreme Court has followed this view 9. rights of a purchaser from a holder in due course Sec 58. WHEN SUBJECT TO ORIGINAL DEFENSES. 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. A holder who derives title to the instrument through a holder in due course has all the rights of the latter even though he himself satisfies none of the requirements of due course holding. A purchaser with notice of defect in title, who takes from a holder in due course, acquires all the rights of the latter and is free from defenses. So is a purchaser after maturity from a holder in due course, whether or not he took with notice. The same rule apply to a holder not for value who takes from a holder in due course, whether he takes before or after maturity, and

(2)

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The terms fraud and illegality should not be construed literally as to exclude other personal defenses. Rather, they should be taken as mere illustrations of defenses which may preclude the operation of the rule if the holder were a party thereto. Note that the rights of a holder in due course are granted only in respect to parties prior to the holder in due course through whom the title is acquired See case: Fossum v Fernandez Hermanos, et al. 44 Phil 713 (1923) 10. presumption in favor of due course holding Sec. 59. WHO IS DEEMED HOLDER IN DUE COURSE. Every holder is deemed prima facie to be a holder in due course; but when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims acquired the title as a holder in due course. But the last mentioned rule does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective title The presumption established by this provision applies in favor of holders only and not to other kinds of transferees. Before the presumption can be availed of by the plaintiff, he has to prove that he is a holder. He has to prove the genuineness of the makers or drawers signature to establish, at least presumptively, the existence of the obligation. In addition, he has to prove the genuineness of all indorsements necessary to his title, to establish has link to the maker and thus his status as a holder. In this connection, the Rules of Court provide that when an action is based on a document attached to the complaint, the defendant, if he denies its genuineness, should do so specifically under oath. Otherwise he will be deemed to have admitted the due execution and genuineness of such document. In such a case, the plaintiff will be relieved from proving the genuineness of the defendant-makers signature, but will still have to prove the genuineness of the indorsements necessary to this title The presumption refers only to the status of the present holder and not to any previous holder. Thus, if the present holders rights depend on a previous holders status as a holder in due course, he would have to prove such fact and cannot rely on the presumption because the latter is no longer the holder Once the plaintiff proves that he is a holder, then the presumption that he is a holder in due course arises. If the defendant claims to have a personal defense, he will have to prove it. Should he succeed in doing so, the burden of proving due course holding will be on the plaintiff-holder. The law in the second sentence of Sec

with or without notice. This rule has a practical reason if a holder in due course cannot invest his transferee with the rights which come with his improved position, his status as a holder in due course would oftentimes lose its significance because the marketability of the instrument would be seriously hampered. If the purchaser from a holder in due course was a party to the fraud or illegality affecting the instrument, he does not acquire the rights of his predecessor. A payee whose title was defective at the time the instrument was issued to him cannot better it by selling the instrument to a holder in due course and buying it back again. Similarly, a person not an original party to the instrument but who was a party to the fraud in procuring it, cannot later recover on the instrument, even if he purchased it from a holder in due course A holder who reacquires from a holder in due course and who, at the time he first held title had knowledge of the defense of a prior party, has been held as disqualified from obtaining the rights of a holder in due course, although strictly speaking he was not a party to the illegality or fraud affecting the instrument. It is to be noted that if the purchaser with notice was not a prior party, and takes from a holder in due course, he is treated as a holder in due course, but if such a purchaser was a prior party and acquires the instrument even from a holder in due course, he is not given the latters rights. These two are treated differently although they both take from a holder in due course and neither is actually a party to the fraud or illegality. In the case of the purchaser who is not a reacquirer, he does in no act which in any way harms the maker. While in the case of the reacquirer his act in negotiating the instrument to a holder in due course was indispensable to the cutting off of the makers defense. So he in effect becomes a party to the fraud by his act of negotiation. In fact, his act of negotiation to a holder in due course in order to shut off the defense upon his reacquisition of the instrument amounts to fraud under Sec 55 But if the reacquirer of the instrument from a holder in due course is a holder at the time he first held title, was not a holder in due course not because he had notice, but solely because he was a donee, he should be treated as a holder in due course because he cannot be reasonably regarded as a party to the fraud or illegality affecting the instrument. Suppose that the reacquirer from a holder in due course was a party to the fraud or illegality and he should negotiate the instrument to another who gives no value thereof, will the latter enjoy the rights of a holder in due course? It is submitted that he will because the mere fact that he did not give value does not make him a party to the fraud or illegality. He certainly acquires his title through a holder in due course.

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if the instrument were non-negotiable, although he himself may satisfy the requirements of Sec 52, unless he obtains the formers indorsement. However, if at the time of such indorsement, the transferee already knew of the defense, or he obtains the indorsement after maturity, such indorsement will not improve his status since his being a holder in due course is determined as of the time of the indorsement. An intention by both parties at the time of the transfer to have the paper indorsed is not enough for it is the actual act of indorsement which constitutes the negotiation. In the absence of proof of the time of the subsequent indorsement, the presumption of Sec 45 that every negotiation is prima facie deemed effected before the instrument was overdue, can probably apply. Chapter 4: Defenses and Equities 1. defenses and equities in general

59, establishes an exception to the last-mentioned rule where the defendants defense is not his own i.e., the burden of proving due course holding will not be on the plaintiff if the defendant became bound on the instrument prior to the acquisition of the defective title relied on by him as a defense. To illustrate: Andoy issues a note payable to the order of Paolo who indorses it specially to Colleen. Colleen indorses it in blank and delivers it to Lori who loses the note. Inna finds it and delivers it to Nikki. When sued by Nikki, assuming Nikki establishes the status of as a holder, Andoys evidence must be such that it convinces the court not only that there was no valid delivery to Inna but also, since he is a party prior to Innas defective title and the defense he uses is not hers, that Nikki does not satisfy the requirement of Sec 52. See case: Asia Banking Corporation v. Ten Sen Guan Y Sobrinos et al. 44 Phil 511 (1923) 11. transfer of unendorsed 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 a holder in due course, the negotiation takes effect as of the time when the indorsement is actually made. Some rights of a transferee without indorsement have been discussed in the preceding chapter. Under Sec 49, he acquires such title as the transferor had in the instrument. If his transferor had legal title, so does he. As to whether he would acquire the rights of a holder in due course under Sec 58 if his transferor was one, is a question on which authorities have differed. Some have held that since Sec 58 favors a holder, it cannot apply to one who is not a holder like a transferee without indorsement. According to this view, Sec 49 grants such transferee the title but not necessarily all the rights of the transferor. In order to acquire the rights of a prior holder in due course, the transferee must first acquire the latters indorsement. Others however believe that Sec 49 and 58 taken together give him the title of the previous holder in due course free from defenses and equities of prior parties. The Uniform Commercial Code has settled the conflict in favor of the latter view in the jurisdictions which have adopted it. It provides that the transfer without indorsement vests in the transferee such rights as the transferor had therein. If the transferor who did not indorse was not a holder in due course, the his transferee is subject to all defenses as

Liability of signatories to a negotiable instrument depends on whether there are existing defenses or claims or ownership thereto. Defenses are two kinds, real and personal. Real defenses are available against all holders, including holders in due course, while personal defenses can be raised only against holders not in due course. Real defenses are those which attach to the instrument itself and generally disclose an absence of one of the essential elements of a contract or where the admitted contract is void for all purposes for reason of public policy. Personal defenses are those wherein a true contract appears, but where for some reason, such as fraud, the defendant is excused from the obligation to perform Claims of ownership, often referred to as equities, are of two kinds: legal and equitable. One who has legal title to the instrument may recover possession thereof even from a holder in due course. One who has the equitable title may not recover its possession from a holder in due course but may do so from a holder not in due course Sec. 57. RIGHTS OF A 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 Sec. 58. WHEN SUBJECT TO ORIGINAL DEFENSES. 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

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cannot be held liable on his contract of indorsement, title to the instrument passes to his indorsee and the latter can rightfully recover from the maker, free from the defense of minority, and free from all personal defenses, if he is a holder in due course. To illustrate: Suppose Andoy makes a note payable to Paolo, a minor. Paolo indorses the note to Inna, who in turn indorses it to Lori. Upon maturity, Lori sues the maker Andoy. May Andoy set up the defense of minority of Paolo? He cannot do so because under Sec 22, the indorsement of the instrument of the instrument by an infant passes the property therein. Furthermore, under Sec 60, he warrants the capacity of the payee to indorse Suppose that Andoy cannot pay the instrument because he is insolvent, and Lori sues Paolo, may Paolo set up the defense of minority against Lori? Yes, because Paolos contract of indorsement is voidable under our law, and this law, as previously stated, is not changed by Sec 22 which precisely states that title passes to the minors indorsee, notwithstanding that from want of capacity the infant may incur no liability on the instrument Suppose that Lori sues Inna instead, is Inna liable to Lori? Yes, not only because of Sec 22 but also because of Sec 66, under which an indorser warrants the capacity of all prior parties. Suppose that in the same illustration, Lori knew at the time he took the note that Paolo is a minor, can he still be a holder in due course? It is submitted that he can because his knowledge of the minority will not constitute notice of defect or infirmity, for Sec 22 precisely cures the defect or infirmity by allowing title to pass to the minors indorsee. Thus, suppose that Andoy, besides the defense of minority, sets up against Lori the defense of failure of consideration between Andoy and Paolo (which defense is merely personal), Lori, who takes with notice of Paolos minority, but without notice of the failure of consideration, can still recover from Andoy. Minority is therefore a real defense available only to the minor, and is not even a personal defense which may be availed of by parties other than such minor The same rules would apply in case the indorser is a corporation which has no capacity to indorse under its charter Besides minors, other persons who have no capacity to give consent to a contract are the insane or demented persons, and deaf-mutes who do not know how to write. In these cases, such incapacity is also a real defense as far as the incapacitated person is concerned since his contract would lack the essential element of consent. Under Sections 60, 61, 62, 65 and 66 the maker, drawer, acceptor and indorser, respectively, admit the capacity of

Sec. 55. WHEN TITLE DEFECTIVE. The title of a person who negotiates an instrument is defective within the meaning of this Act when he obtained the instrument, or any signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration or he negotiates it in breach of faith, or under such circumstances as amount to fraud Under Sec 58, if the holder is not a holder in due course, the general rules on contract would apply, under which no distinction is necessary between real and personal defenses because the assignee can acquire no better title than his transferor Sec 55 enumerates the circumstances which renders a holders title defective and implies the right of the real owner of the instrument who was deprived of his possession through any of such circumstances to get the instrument back from the guilty holder or from any subsequent holder who is not a holder in due course. If it comes to the hands of a holder in due course, the latter is free from the defect of title of any prior party and the true owner will therefore not have the right to recover its possession from him Real defenses include forgery, incapacity, fraud in the execution, some types of duress, and lack of delivery of an incomplete instrument (Sections 23, 22, and 15 NIL) Personal defenses would include those mentioned in Sec 55, want of consideration, incompleteness of the instrument and lack of delivery of a completed instrument (Sections 28, 14, 16 NIL) Though equities refer to claims of ownership, the term defenses is often used to include them. In the following discussion, the distinction in terms will not be stressed, and attention will be centered mainly on whether a claim or defense is available against all holders or only against holders not in due course 2. incapacity

Sec. 22. EFFECT OF INDORSEMENT BY INFANT OR CORPORATION. The indorsement or assignment of the instrument by a corporation or by an infant passes the property therein, notwithstanding that from want of capacity the corporation or infant may incur co liability thereon. The above provision does not change our law on minors contracts. In this jurisdiction, a contract entered into by a minor is voidable, and the minor cannot be held liable thereon unless he ratifies it upon reaching majority. He cannot even be made to restore anything he has received by virtue of the contract, except to the extent to which he has been benefited thereby. However, under Sec 22, should he indorse a negotiable instrument, although he

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Sec. 18. LIABILITY OF PERSON SIGNING IN TRADE OR ASSUMED NAME. No person is liable on the instrument whose signature does not appear thereon, except as herein otherwise provided. But one who signs in a trade or assumed name will be liable to the same extent as if he had signed in his own name Under Sec 23, forgery is a real defense. A person whose signature to an instrument was forged was never a party and never consented to the contract which allegedly gave rise to such instrument. Since his signature does not appear on the instrument, he cannot be held liable thereon by anyone, not even by a holder in due course. Sec 23 deals with 2 sets of situations: (1) where the signature on the instrument is affixed by any one who purports to be an agent but who does not have the authority to bind the alleged principal; and (2) where the signature is affixed by one who does not claim to act as an agent and who has no authority to bind the apparent signer. The signature in both cases is wholly inoperative and no one can gain title to the instrument through it. Any party subsequent to the forgery would be unable to acquire any rights against any party prior to the forgery. The law makes an exception to this rule where the party against whom it is sought to enforce a right is precluded from setting up forgery or want of authority. Whether estoppel is present or not will depend on the facts of each case. As to whether precluded includes ratification has been the subject of conflicting views. One view holds that a forged signature cannot be ratified because ratification involves the relation of agency, and a forger does not assume to act for another. Another view distinguishes between forgery which amounts to a crime and one which does not, and allows ratification in the latter case only. Other makes no distinction, and hold that one whose signature has been forged and who, knowing all the circumstances, acknowledges the signature is bound as if the note had been signed by him originally, regardless of whether his acknowledgement amounts to an estoppel or not. The NIL gives at least 2 situations where a party is precluded to use the defense of forgery. A general indorser subsequent to the forgery warrants among other things that the instrument is genuine, and that it is valid and subsisting at the time of his indorsement. His warranty therefore precludes him from setting up forgery as a defense. Similarly, an acceptor is precluded from claiming that the drawers signature is forged, because under Sec 62 he warrants its genuineness. The inoperativeness of a forged signature may be illustrated as follows:

the payee to indorse and therefore they cannot set up such incapacity as a defense 3. illegality

Illegality is generally a personal defense not available against holder in due course. Article 1409 CC enumerates the contracts which are void, inexistent, and incapable of ratification. Among these is a contract with an illegal cause. Since such a contract is not merely voidable but is no contract at all, its illegality should normally be a real defense available even as against holders in due course. On the other hand, Sec 55 treats illegal consideration as a mere personal defense. Thus we have here a situation where although the contract lacks the essential element of a lawful cause or consideration, the law treats the defect as a defense available only as against holders not in due course. The Civil Code and the NIL are not inconsistent with each other because they deal with different situations. While the former specifies what contracts are void and inexistent, the latter in effect provides that though a negotiable instrument may have been issued or negotiated for an illegal consideration, only the parties involved in the illegality and subsequent parties who are not holders in due course can be adversely affected by such defect. Thus, although a gambling note may be unenforceable between the original parties by reason of illegal consideration, it is valid and enforceable in the hands of a holder in due course, who can recover its full amount against the maker. This is so not only because of Sec 55 but also because Sec 9 of Act 1757 provides that a promise to pay money lost at gambling is void, except as to a purchaser for value before maturity, in good faith and without notice. The defense of usury is merely personal and not real under Sec 7 of the Usury Law A statute may however declare a contract void for all purposes, in which case the defense of illegality becomes real See case: Rodriguez v. Martinez 5 Phil 67 (1905) 4. forgery a. in general

Sec. 23. FORGED SIGNATURE, EFFECT OF. When a signature is forged or made without authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefore, or to enforce payment thereof against any party thereto, can be acquired through or under such signature unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority

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See case: PNB v. Hon. Romulo Quimpo L-53194 March 14, 1988 b. acceptance and payment under mistake i. when drawee accepts or pays forged instrument Where the drawers signature is forged on a bill or check, the drawee who pays it without having detected the forgery cannot charge the amount thereof to the drawers account. The forged signature is wholly inoperative and does not give him the right to discharge it. Since the forger would usually be insolvent, the drawee would have to look for recourse elsewhere and his most logical target would be the person to whom he paid the forged bill or check. Would the drawee have the right to recover from such recipient the amount represented by the forged bill? It is general principle of law that money paid under mistake may be recovered. However, an exception to this rule in the law of negotiable instruments was laid down by Lord Mansfield, in the leading case of Price v. Neal. This case that the drawee that had paid an accepted bill as well as a non-accepted bill, each of which bore the forged signature of the drawer could not recover the money paid out on either bill. The drawee is bound to know the signature of the drawer and must therefore bear the loss in case it turns out to be forged. Although most of the courts followed the rule, they varied in their opinions as to the reason behind it. Some believed it was based solely on the drawees negligence, others that it was founded on natural justice, but many agreed that it was based on commercial convenience and necessity. Confidence in negotiable paper would be greatly diminished and instability of commercial transactions would surely result from a situation where the drawee that had already paid the bill could get back what he paid should forgery be later discovered. It is therefore essential that there should be a final settlement, as between the drawee and his recipient, of the question of the drawers signature, and what better time for this than the payment of the bill The rule in Price v. Neal had been followed by the majority of the courts at the time the Uniform Negotiable Instruments Law was drafted, and Sec 62 is considered by most of them to have embodied such rule Sec. 62. LIABILITY OF ACCEPTOR. The acceptor by accepting the instrument engages that he will pay it according to the tenor of his acceptance; and admits: 1. the existence of the drawer, the genuineness of his signature and his capacity and authority to draw the instrument; and 2. the existence of the payee and his then capacity to indorse

Suppose Andoy makes a note payable to Paolo or order. Paolo indorses it specially to Inna, in whose hands it is stolen by Lori. Lori forges Innas signature and sells the instrument to Pia. Pia indorses it to Nikki, a holder in due course. We have thus the following indorsements on the back of the note Pay to Inna (sgd.) Paolo Pay to Pia (sgd.) Inna (forged) Pay to Nikki (sgd.) Pia Nikki cannot go against Andoy or Paolo because Nikkis rights against them have been cut off by the forged signature of Inna. Neither can Nikki go against Inna because Inna has no privity with her, unless of course Inna is guilty of estoppel. But Nikki may go against Pia who, as a general indorser warranted that the instrument is genuine and valid at the time of her indorsement. Does Inna have any right against Andoy and Paolo? Yes, because she is the real owner of the note and her rights against such parties were not affected by the forgery. Their signatures are genuine and they are bound by their contract and are therefore liable to Inna. Section 23 does not avoid the instrument but only the forged signature. Rights and obligations may therefore exist by virtue of such instrument. Inna may recover possession of the instrument from Nikki even if the latter is a holder in due course, because Nikki has no right to retain the instrument and must therefore surrender it to the rightful owner, Inna, who may thereafter enforce it against Andoy or Paolo Where an instrument is originally payable to bearer, the effects of a forged indorsement thereon will be different. The holder of such instrument who did not know of the forgery can still enforce it against the drawer or maker because he can cancel the forged indorsement as not being necessary to his title. He did not acquire his right through or under such (forged) indorsement. However, should there be an indorsement subsequent to the forged one, the holder, should he be unable to recover from the maker, may have a right of recourse against such subsequent indorser on the latters warranty that the instrument is genuine and valid at the time of his indorsement Unless the signature is deemed admitted by the pleadings, the burden of proving the genuineness of a signature is on the person basing his claim thereon See case: San Carlos Milling Co., Ltd. V. BPI and CBC 59 Phil 59 (1933)

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accepted bills and the law merchant to paid but nonaccepted bills. In PNB v. National City Bank of NY and Motor Service Co., Inc., our Supreme Court in a rather lengthy and confusing decision, came out in support of the minority view that Sec 62 applies only to accepted bills, under the misconception however that the Price v. Neal rule had become obsolete. But in PNB v CA, it recognized and applied the prevailing view that Sec 62 covers not only accepted bills but also bills paid without having been previously accepted. The rule admits of certain exceptions first recognized by Lord Mansfield in Price v. Neal. A person who was guilty of fraud or negligence in obtaining the bill, or who had not given value therefore, has no right to retain the money paid to him by the drawee by virtue of a forged bill. Thus, the acceptor can recover from the forger, or from one who bought from a known forger. And it is generally held that a purchaser, who took from a complete stranger without making inquiries which would have revealed the forgery, is guilty of negligence so as to preclude him from retaining the proceeds of the forged bill. See case: Price v. Neal 3 Burr. 1354 (1762) See case: PNB v. National City Bank of NY and Motor Service Co., Inc. 63 Phil 711 (1936) See case: PNB v CA L-26001, October 29, 1968; 25 SCRA 693 See case: Republic v. Equitable Banking Corporation L15894, Jan 30, 1964 ii. extension of Price v. Neal doctrine 1. over draft The rule in Price v. Neal, creating an exception to the doctrine of payment under mistake, has been extended by the courts to cover the drawee of a bill that honors an overdraft. An overdraft occurs when a check is issued for an amount more than what the drawer has in deposit with the drawee bank In this case, the drawee that pays the holder of the bill despite the fact that the drawer had no sufficient funds to cover it, cannot recover from said holder what he paid under mistake. It was his duty before accepting or paying the bill to find out whether he owed the drawer that amount. On the other hand, the payee or holder had no means of knowing what the actual account of the drawer was, and he had the right to assume that the

It is clear from this provision that since the acceptor admits the genuineness of the drawers signature, he would be precluded by Sec 23 from denying liability based on its forgery. So that if he learns of the forgery after his acceptance of the bill but before he has paid it, he cannot refuse payment on the ground of such forgery. If he learns of it only after having paid the bill, neither can he recover what he paid because of his warranty under Sec 62. Whether Sec 62 applies to a drawee that pays the bill without having previously accepted it, it is a question on which there has been conflicting opinions. One view believes that Sec 62 can apply only to an accepted bill and cannot cover one which was paid outright without previous acceptance. According to this view, payment and acceptance have different connotations and the latter does not include the former. Payment discharges the instrument and converts it into a mere voucher, while acceptance implies its continued existence and its possible negotiation. (minority view) The prevailing (majority) view however believes that Sec 62 incorporates the Price v. Neal doctrine in full because it was the intention of the drafters of the Uniform Act to codify and make uniform the existing common law or law merchant, which at the time was the Price v. Neal rule. The argument of the minority view that payment is different from acceptance is not denied by the majority but it is answered with the assertion that payment is more than an acceptance because while the latter is merely an obligation to pay, the former is the discharge of such obligation. And if one binds the drawee, it is inconceivable why the other would not. Thus, one who pays necessarily accepts. But the conflict between the majority and the minority ends with the distinction between payment and acceptance, because the minority still applies the Price v. Neal doctrine to bills paid without previous acceptance, through Sec 196. This section provides that in the absence of any applicable provision of the NIL, a case shall be governed by the existing legislation, or in default thereof by the rules of the Law Merchant. Since the NIL is silent on the effect of a drawees paying a forged bill without having previously accepted it, the law merchant should apply. And the law merchant is the Price v. Neal rule. In the final analysis, both majority and minority views prevent a drawee that has paid a forged bill, whether previously accepted or not, from recovering from the recipient of the amount he paid because he is bound to know the drawers signature. They differ only as to the basis of such rule the majority relying completely on Sec 62, and the minority applying Sec 62 only to

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should also fill out the check stub to which the check is usually attached. This stub, if properly kept, will contain the number of the check, the date of its issue, the name of the payee and the amount thereof. The drawer would thus have a complete record of the checks he issues. It is the custom the banks to send to its depositor a monthly statement of the status of their accounts, together with all cancelled checks issued by them and which have been cashed by their respective holders. If the depositor has filled out his check stubs properly, a comparison between them and the cancelled checks will revealed any forged check not taken from his checkbook. It is the duty of the depositor to carefully examine the bank statement, his cancelled checks, his check stubs and other pertinent records within a reasonable time, and to report any errors without unreasonable delay. If his negligence and delay should cause a bank to honor a forged check or prevent it from recovering the amount it may have already paid on such check, he cannot later complain should the bank refuse to recredit his account with the amount of such check. In other words, the bank is freed from liability only if the proximate cause of its wrongful payment is the negligence of the drawer, but not otherwise. The detection of a forged check may be more difficult if it was taken from the depositors own checkbook since the forger would also fill in the check stub to correspond with the forged check. This situation is usually one where the blank check is stolen and forged by one of the depositors employees and often involves a series of forgeries. If the negligence of the depositor should delay discover of the forgeries and this negligence should deprive the bank opportunity to recover from the forger, the depositor would have to bear the burden of the loss and cannot thereafter demand a recrediting by the bank iv. effect of payment under forged indorsements Although an exception to the doctrine of payment under mistake is made in case of a drawee that accepts or pays a bill on which the drawers signature has been forged, no exception lies in the case of the drawees acceptance or payment of a genuine bill where only an indorsement has been forged. In this case the drawee can recover the amount paid out by him since he makes no warranty as to the genuineness of any indorsement. However, when he learns about the forgery, he should notify the holder to whom he paid as promptly as possible. Should he do so, his right of recovery will not be affected by his subsequent knowledge of the forgery. But should he fail to act promptly, he may lose his right to recover against the holder if his negligent delay operates to the latters prejudice. The latter may suffer loss should the insolvency of a prior party or of the forger supervene or should the forger escape from the jurisdiction

drawee would not accept or pay the bill unless he had sufficient funds of the drawer to cover it. However, such holder must have been a bona fide purchaser of the bill otherwise the drawee may recover from him. Though the drawee may have no legal right to recover from the recipient money paid out on an overdraft, it has a claim against the drawer for the same 2. stop payment order

A stop payment order is one issued by the drawer of a check countermanding his first order to the drawee bank to pay said check, i.e., the drawer is ordering the drawee bank not to pay the check issued by him. Since it is the drawers funds involved, the drawee is bound to follow this stop order, provided it is received prior to its certification or payment of the check. The Price v. Neal rule has been extended by the courts to cover the situation, where the drawee bank, through oversight or otherwise, pays the check despite the stop order. It cannot, by later claiming mistake or oversight, recover the money it paid to a bona fide holder who cashed it. Payment was voluntary on the part of the bank which, because of the stop order, was under no legal obligation to pay, and its negligence in paying precludes it from reclaiming the amount from a bona fide holder Since the drawee bank did not follow the latest order of the drawer to stop payment, the drawee bank who nevertheless paid the check cannot charge the amount thereof against the drawers account, unless such payment discharged a legitimate debt of the drawer. Thus, although the drawer has the right to stop payment even where the check is in the hands of a holder in due course, in the subsequent action by the drawer against the drawee bank, the latter is subrogated to the rights of the holder in due course and may not be compelled to recredit the amount of the check to the drawers account. The holder in due course have recovered anyway against the drawer had the bank dishonored the check. If however the drawee bank pays to a fraudulent payee or any subsequent holder not in due course, the drawer would be entitled to a recredit because payment did not discharge any legitimate obligation on his part. If the stop order comes after the bank has certified or accepted the check, the bank is under legal duty to pay the holder and will not be liable to the drawer for doing so iii. effect of depositor negligence of

When a person opens a checking account with a bank, he is given blank checks which he may fill out and use whenever he wishes. Each time he uses a check, he

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A different situation arises where the indorsement was forged by an employee or agent of the drawer. Almost all cases of an agents forgery involve the payees indorsement. The drawer and the payee would oftentimes have business relations. Sooner or later, some leak will show on the drawers books and if these are under careful observation by the drawer or an employee who is not a party to the fraud, the leakage will be discovered. It will then be just a question of time until forgery is pinpointed as the cause of the business leakage. This is especially true where the agent perpetrates a series of forgeries. If due to the drawers negligence, the forgery is not discovered until it is too late for the bank to recover from the holder or forger, then the drawee may properly charge the amount against the drawers account. In any case, the drawer, as soon as he comes to know of a forged indorsement should promptly notify the drawee bank. Otherwise, should his negligent delay be the proximate cause of any subsequent loss to the bank, the latter may properly charge it to the drawers account 5. material alteration a. in general

Should the drawee fail to recover from the holder who received payment due to the latters insolvency, he cannot recoup his loss by charging it to the drawers account. Under Sec 23, the forged signature is wholly inoperative and the drawee acquired no right to discharge the instrument by paying it. But where the instrument was originally a bearer one, the drawee may debit the drawers account in spite of the forged indorsement, since in this case such indorsement may be disregarded as being unnecessary to the holders title. He was the bearer of the instrument and the payment to him was valid and binding. The drawee can therefore not recover from the holder the amount paid to the latter, but may properly charge the account of the drawer However, where the negligence of the drawee bank is the proximate cause of a collecting banks payment of a check with a forged indorsement, the former may be held liable to the latter bank. But where both the drawee and collecting banks are guilty of negligence, the degree of negligence of each will be weighed in considering the amount of loss which each should bear See case: Great Eastern Life Insurance Co. v. HSBC 43 Phil 678 (1922) See case: Jail-Alai Corp of the Philippines v. BPI No. L29432 August 6, 1975; 66 SCRA 29 See case: Republic Bank v Mauricia T. Ebrada L-40796 July 31, 1975; 65 SCRA 680 See case: Natividad Gempesaw v. CA and Philippine Bank of Communications L-92244, Feb 9, 1993; 218 SCRA 682

Sec. 124. ALTERATION OF INSTRUMENT; EFFECT OF. Where negotiable instrument is materially altered without the assent of all parties liable thereon, it is avoided, except as against a party who has himself made, authorized or assented to the alteration and subsequent indorsers. But when an instrument has been materially altered and is in the hands of a holder in due course, not a party to the alteration, he may enforce payment thereof according to its original tenor. Sec. 125. WHAT CONSTITUTES A MATERIAL ALTERATION. Any alteration which changes: 1. the date; 2. the sum payable, either for principal or interest; 3. the time or place of payment; 4. the number of relations of the parties; 5. the medium of currency in which payment is to be made; 6. 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 A material alteration, since it changes the contract of the parties, avoids the instrument and discharges all parties, unless they authorized or consented to the alteration. A subsequent indorser is expected from this rule because by the indorsement he warrants, among other things, that the instrument in all respects what it purports to be and that it was valid and subsisting at the time of his indorsement. On the other hand, a holder in due course

v. effect of negligence of drawee in informing recipient of forgery See case: Clearfield Trust Co. v. US 318 US 363, 63 S. S. Ct. 573 (1943) vi. effect of negligence of drawer in case of forged indorsements on checks As previously seen, a drawer cannot be charged by the drawee bank who has paid a check on which an indorsement has been forged. If a check was stolen from the payee or a special indorsee, it is quite obvious that the drawer cannot possibly discover the forged indorsement by a mere examination of his cancelled checks. This accounts for the rule that although a depositor owes a duty to his drawee bank to examine his cancelled checks for forgery of his own signature, he has no similar duty as to forged indorsements.

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the spoliation does not affect the instrument, provided the original meaning can be ascertained. b. effect of negligence of drawer of checks The general rule denies the drawee banks right to charge against the drawers account the amount of an altered check. However, the latters negligence, before or after the alteration, may estop him from setting up such alteration as against an innocent drawee bank who has paid the check. Thus, where the drawer of a check who in filling it out negligently leaves spaces, making it possible for another to alter the amount by inserting the words and figures therein, the drawer cannot complain should the bank pay and charge the amount as altered against his account. It was his negligence which proximately caused its payment. However, there is a conflict or opinion as to whether such estoppel can apply in favor of a holder in due course. Some courts refuse to apply such estoppel against the drawer in favor of a holder in due course, who, in spite of the drawers negligence, is allowed to recover only the original. The basis given for the difference lies in the fact that since a bank has the duty of honoring checks drawn against it by its depositors, the drawer owes a corresponding duty to his bank to fill in his checks carefully. On the other hand, one to whom a check is negotiated is under no duty to take it. The drawer therefore owes him no duty of diligence. The Uniform Commercial Code rejects this view and provides that the drawer is liable to a holder in due course for the terms as altered Where the negligence of the drawer consists in failing to discover alteration previously made, the rule is similar to that applicable to forged check. Thus in a series of alterations of several checks, if the drawer could have discovered the alterations by a comparison between his cancelled checks and his check stubs, or by a diligent observation of his record, and could thus have prevented the drawee bank from subsequently cashing other altered checks, the latter can charge the subsequent checks against the negligent drawers account c. effect of drawees payment acceptance of altered check or

may enforce the altered instrument according to its original tenor. This presupposes of course that the alteration is not apparent on its face of the instrument, otherwise, it would be irregular and no holder thereof can be a holder in due course. Where the alteration is of the amount, the holder in due course can recover the original sum. The drawee bank can likewise charge the drawers account with the original amount. If the holder is not one in due course, he cannot recover anything and the drawee bank cannot charge any part of the amount against the drawers account. Where the interest rate is altered, the holder in due course can recover the principal sum with the original rate of interest. Where the date of the payment is changed, the original date of maturity controls in determining whether or not a holder is a holder in due course. Material alteration is therefore a personal defense when used to deny liability according to the original tenor of the instrument, but is a real defense when relied on to deny liability according to the altered terms Since Sec 124 makes no distinction, the instrument will be avoided whether the material alteration was made with or without fraudulent intent and whether it proves beneficial or prejudicial to the interests of prior parties. Sec 125 specifies and defines what constitutes a material alteration. Any other alteration would be non-material and would not affect the liability of any prior party on the instrument. Thus, the addition of words implied by law, or changing marginal figures to make them conform to the sum expressed in words, is not material alteration because it does not change the legal effect of the instrument Changing the payees name is obviously a material alteration. It may consist in erasing the original payees name and writing the name of another. Where the instrument is payable to joint payees, the alteration may consist in erasing the word and between the names of the two payees, and by replacing it with or, making the instrument payable to alternative payees. But where the erasure is made before the issuance by the maker or drawer, there being no other signatures at such time, there is no material alteration. The instrument has no legal existence prior to such issuance. If the payees name is altered after the issuance, no purchaser, though innocent, can derive title as regards the payee and prior parties. The addition of a name, either as a primary party or as a secondary party, is a material alteration. Spoliation or a material alteration by a stranger, did not avoid the instrument under the common law. Section 124 does not distinguish, but the cases that have been arisen under the NIL have continued to apply the common law rule i.e.,

Suppose a drawee bank has cashed a check on which the amount has been altered, can it recover back from the recipient-holder in due course the difference between the original and altered amount? Similarly, if the drawee bank has paid a check on which the payees name was changed, can it recover back the money it paid? There is much conflict of opinion on this matter but the prevailing view, which was the common law rule, allows

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be effective only to the extent of the original and not the altered tenor of the instrument. Our Supreme Court has in effect come to the same conclusion as the minority view but on an entirely different basis. In the case of HSBC v. Peoples Bank & Trust Co, the drawee bank was denied recovery based on a Central Bank Circular regulating clearing of checks and limiting the period within which a drawee bank may return a spurious check. No mention of Sec 62 or of Sec 124 or of any provision of the NIL was made. The Circular has since been amended. The case below present the minority view: See case: HSBC v. Peoples Bank & Trust Co. L-28226, Sept 30, 1970 35 SCRA 140 The effect of the two decisions above was to place the loss in the case of altered checks solely on the drawee bank. It cannot charge the drawers account because of Sec 124 and it cannot recover from the collecting bank under the above decisions. Note that the Court made no reference whatever to the NIL The case of Republic v. Equitable Banking Corporation L-15894, Jan 30, 1964, referred to by the Court in the HSBC case involved treasury warrants on which the signatures of the drawing officer and of the Auditor General were forged. The decision allowing recovery in favor of the drawee bank was based not only of the CB Circular but also on the negligence of the Treasurer in clearing its own warrants which were on their faces irregular because there were for amounts beyond the authority of the Auditor to approve. A drawee bank is bound to know the signature of its depositors, so when it honors checks on which the drawer-depositor signature is forged, it has no excuse for later trying to recover from the collecting bank. And even in the case where the forgery is so skillfully done that the drawee could not have detected it, still the drawee would be estopped from recovering because under Sec 62 the drawee bank by accepting or paying a check admits the genuineness of the drawers signature. As earlier stated, the justification f this rule is that payment on a check must at some time or another become final. Any other rule would affect the stability of commercial transactions Alteration of the payees name or of any other material terms of the check is an entirely different matter. If the alteration is not apparent of the face of the check, the drawee bank would not discover the alteration until it is informed by the drawer after the latter has received the cancelled check. Then because of Sec 124, it would have to recredit the drawer with the amount of the check. When it receives an altered check through the clearing house, the check looks regular on its face. There would

such recovery on the ground that the amount is paid under mistake and that under Sec 124, a holder in due course can recover only according to the original and not the altered tenor of his acceptance and is therefore estopped from recovering. The question has been discussed widely and even text-writers have differed in their views The arguments set forth by the majority view find strong support in the legal provisions. Acceptance is defined by Sec 132 as the signification of the drawee of his assent to the order of the drawer. Sec 62 should be related to this definition. Assent to the order of the drawer means assent to the actual not the apparent order of the drawer. In like manner, Sec 139 in defining general and qualified acceptance, provides: A general acceptance assents without qualification to the order of the drawer. A qualified acceptance in express terms varies the effect of the bill as drawn. In both these provisions, acceptance is definitely associated with the order of the drawer and not with what appears to be the drawers order after the alteration. The words according to the tenor of acceptance should thus be construed to mean the kind of acceptance whether qualified or general. Furthermore, Sec 124 avoids the instrument except as against a party who has himself made, authorized or assented to the alteration because assent can only mean assent with knowledge of the facts. Neither is he a subsequent indorser. The final and perhaps the strongest legal argument is that Sec 124 expressly provides that a holder in due course can recover only according to the original tenor of the instrument. There is however one important and desirable effect of the minority view which cannot be ignored denying recovery to the drawee bank would tend to give stability to checks. Furthermore, as between the holder and the drawee bank, it seems that the latter is in a better financial position to shoulder the loss, since it can and probably should insure itself against such eventualities It will be recalled that the rule in forgery of the drawers signature is that the drawee cannot recover form the holder in whose favor it cashed such check. The basis of this rule is that as between the holder and the drawee bank, the latter is in much better position to know the signature of the drawer since the latter is its customer. It is for this reason that Sec 62 incorporates the acceptors warranty of the genuineness of the drawers signature. In the case of the altered check however, there can be no similar basis for holding the drawee bank responsible for non-apparent alterations. Although it is bound to know the drawers signature, it would be unfair to burden it with knowledge of the drawers handwriting. Any many times checks are not filled in by hand but by computer or in print. Payment by the drawee bank of the altered check would therefore be indeed a mistake, and should

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payees name, the full amount, and in the case of a forged instrument, also the full amount The Circular is not necessarily inconsistent with Sec 124. The latter voids the instrument which is materially altered. The Circular assumes its nullity and merely prescribes a period within which a drawee bank can protect itself from the effects of such nullity On the other hand, the minority view that the drawee bank cannot recover anything from the holder-recipient because it is estopped under Sec 62, is inconsistent with the above clearing house rule 6. fraud

be absolutely nothing to warn it about the defect, and thus all it would do and should be expected to do is to check the sufficiency of the drawers funds and the genuineness of the signature. It would be highly impractical to require the bank to check with each drawer the correctness of the terms of the check he has issued, even in the cases where his signature is admittedly genuine and his deposit is sufficient to cover the check. Yet this is in effect the burden which the HSBC case places on the drawee banks. But would it be possible for them to do this with all checks drawn daily against them within the short period allowed by the clearing house rule referred to in the case? Realizing perhaps the unfair effect of the circular on the drawee banks, BSP changed the clearing house rule (Circular No. 580, Series of 1977, Sec 4(c) The first sentence of the rule states that defective items should be presented not later than the next clearing for local exchanges. Under Sec 1 of the Circular, the clearing is conducted at 4 p.m. every business day. Thus, defective items must be returned by the drawee bank not later than 4 p.m. the next business day after the questioned check was presented for clearance. But as to the altered checks and checks with forged indorsements, an exception is made. As to these, the drawee bank can still return them even after 4 p.m. of the next day provided it does so within 24 hours from its discovery of the alteration or forged indorsement, but in no case may return be made beyond the usual prescriptive period prescribed by law, which would be 10 years since the relationship between drawee bank and collecting bank would normally be evidenced by some written document. Thus, if the drawer discovers the alteration or forged indorsement say, one year after the checks clearing, he should notify the drawee bank promptly; the latter in turn, must notify and return the defective check to the collecting bank not later than 4 p.m. of the next business day after it receives notice of the defect. Otherwise, the collecting bank will not be liable to return the amount to the drawee bank In effect, therefore, the drawee bank which has paid an altered check to a collecting bank bears the loss only if it is itself negligent in failing to return the check promptly after discovery. The Circular does not prevent recovery from the collecting bank of the amount paid under an altered check or forged indorsement, but merely prescribes the period within which such recovery may be demanded. The rule is therefore consistent with the majority view allowing recovery by the drawee bank from the holder in good faith who obtained payment in such cases in the case of the altered check, the difference between the original and altered amount, or if the alteration is as to some other material matter, like the

Under Sec 55, fraud is among those circumstances which render a partys title defective. Such defective title is a personal defense and cannot be used against a holder in due course. However, fraud in factum or fraud in the execution is a real defense and the maker or drawer who was tricked into signing a negotiable instrument cannot be held liable to any holder, even to a holder in due course. Even if the signature is genuine, there was absence of consent which completely avoids the instrument as against any holder. Where the signer knows that the paper he is signing is a negotiable instrument, but is deceived as to the value or its terms, the fraud is referred to as fraud in the inducement which is merely a personal defense available only against holder not in due course. This is the type of fraud referred to in Sec 55 Where the signer does not know the nature of the instrument he signs but where, by the exercise of ordinary care, he could have discovered it, the fraud exercised on him cannot be considered real but only personal defense. Whether negligence is present or not is a question of fact which has to be determined according to the particular circumstances of each case. Three factors have often been considered by American courts in determining its presence: (1) the legal character of the instrument which the signer thinks he is signing; (2) the physical condition of the signer and his ability to read; and (3) whether the signer had the opportunity at the time of signing, to ascertain the legal nature of the paper he is executing. A lesser duty of care, for example, would be imposed on one who thinks he is signing a paper which does not impose a legal obligation than on one who believes he is signing a contract. Inability to read would generally show absence of negligence, but the circumstances may be such that liability to a holder in due course may be held to exist. If a third party is present or available, a

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instrument is no longer in the possession of a party who signed it, a delivery is presumed until the contrary is proved. If the holder is a holder in due course, the instrument is not merely prima facie deemed delivered, but this fact is conclusively presumed. Thus, if a complete instrument is stolen from the maker or drawer, and negotiated to a holder in due course, such maker or drawer cannot set up the defense on non-delivery because it is a personal defense available only to immediate parties and as regards remote parties who are not holders in due course. This is true even if the instrument is payable to bearer. Similarly, where the maker or drawer delivers a complete instrument payable to the order of X to his secretary for safekeeping, and the latter, in violation of the makers instructions, delivers the same to X, X cannot recover from the maker in the face of proof that the delivery to the secretary was for a special purpose only and not for the purpose of transferring the property in the instrument. However, should such instrument come into the hands of a holder in due course, the maker is liable to him regardless of any proof of the lack of valid delivery. This provision does not govern the rights of a holder in due course of an incomplete instrument which has not been delivered as Sec 15 specifically deals with these cases 9. incomplete instrument which is undelivered

signer, who cannot read will be held negligent if he does not request such third party to inform him of the contents of the paper, but merely relies upon the statements of the party with whom he is dealing. On the other hand, a person who can read will generally be held negligent, although there may be circumstances which may free him from liability. Thus, where the plaintiffs signature to a check was fraudulently procured by placing a carbon copy under some other papers which he knowingly signed, he will not be liable even to a holder in due course 7. duress

Duress like fraud, is one of those mentioned in Sec 55 as making the title of the person employing it defective. Normally therefore it is merely a personal defense which cannot be used to defeat the rights of a holder in due course. There may be cases however where the duress employed is so serious that it will give rise to a real defense, because of the lack of contractual intent. Although the signer may know what he is signing, there may be wanting the intent or willingness to be bound. Like in forgery and fraud in the execution, the signer may never have intended to be bound by the contract. If he acted, not in accordance with his own will but in accordance with the will of another because of his wellfounded fear of an imminent and serious injury, the defense of duress would be real 8. complete instrument which is undelivered

Sec. 16. DELIVERY; WHEN EFFECTUAL; WHEN PRESUMED. Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As between immediate parties, and as regards a remote party other than a holder in due course, the delivery in order to be effectual must be made either by or under the authority of the party making, drawing, accepting, or indorsing, as the case may be; and in such case, the delivery may be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property in the instrument. But where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed. And where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved. Non-delivery of a complete instrument is only a personal defense. Delivery of an instrument is a prerequisite for liability. If the instrument is complete in all its particulars, but is not delivered, there is no contract. However, if the

Sec. 15. INCOMPLETE INSTRUMENT NOT DELIVERED. Where an incomplete instrument has not been delivered, it will not, if completed and negotiated, without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery This section contemplates an instrument which is not only undelivered but also incomplete. In this case a real defense exists and not even a holder in due course can recover on the instrument, for the law is specific that it is not a valid contract in the hands of any holder. The conclusive presumption of delivery in Sec 16 cannot apply, although possession of an incomplete instrument raises a prima facie presumption of delivery If the instrument is complete, Sec 16 would apply and lack of delivery may be proven and if so proven, not even a holder in due course can recover thereon against prior parties who had not authorized its delivery and/ or completion. If the signed instrument is blank as to payee or as to amount, it is clearly incomplete and therefore covered by Sec 15. But where the instrument is complete except for the date of issue and is stolen from the owner, is the case as clear? Similarly, where the instrument has an unfilled blank as to attorneys fees, but is otherwise complete, is it incomplete so as to make Sec 15 applicable? In the last 2 cases, the contract of the

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This provision merely raises personal defense. It covers two kinds of writings: (1) incomplete instruments, and (2) a blank paper or a paper so far incomplete that it does not constitute an instrument within the meaning of the definition of this term, but signed. The first kind involves a writing which, although containing blanks, is so far completed that it is an instrument, i.e., where the writing recites enough of the formal requisites to make evident the intention to make the writing operate as a negotiable instrument. In such case, any person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. This section contemplates a delivered instrument, and not an undelivered instrument, which is covered by Sec 15. Therefore, person in possession does not apply to a thief or finder, but means a person in lawful possession one to whom the instrument was delivered by the maker or drawer The second kind of writing is one which is so far incomplete that it is not an instrument. In this case, two conditions must be present before the presumption of authority to complete may arise: (1) delivery of instrument, and (2) the delivery must have been for the purpose of converting it into a negotiable instrument. Thus, if a paper or writing is delivered without such intention, its subsequent conversion into a negotiable instrument will not render the person signing liable to anybody, not even to holder in due course. The presence of such intention must be proven by the possessor of the instrument Because of the presumption of authority, the burden of proving that there was no authority or that authority granted was exceeded is placed on the person questioning such authority. However, even if such authority has been exceeded, if the instrument is in the hands of a holder in due course, he may enforce it as if it had been filled up strictly in accordance with such authority, he cannot recover. May he not recover upon the instrument as if it would have been if it had been completed within the authority granted? It would seem that he cannot, since the law states that in order that such instrument, when completed, may be enforced against any person who became a party thereto prior to its completion, it must be filled up strictly in accordance with the authority given. To permit recovery to the extent of the authorized terms by a holder not in due course would be enforcing the instrument for such amount. The law in effect avoids the instrument in the hands of a holder not in due course, and such holder is treated in the same way as a holder not in due course of a materially altered instrument As to a signed blank paper, the law provides that there is prima facie authority to fill it up for any amount. Does this include authority to fill in other blanks? It is believed that it does, especially as to all missing

signer was complete except for minor details which may be supplied by the holder, in the case of the date of issue, or by the courts, in the case of the attorneys fees. Would it be justifiable to claim that the instrument was issued incomplete and allow a defense of delivery against a holder in due course? It would seem that if an instrument contains all the requisites for making it a negotiable one, it should be considered as complete though in fact may have blanks as to non-essentials, so as to give rise to a conclusive presumption of delivery in favor of a holder in due course. Although the fact that an incomplete instrument was undelivered is a real defense, the majority of the courts have held that as against a drawee bank, the drawer is estopped to rely on Sec 15 if his negligent custody of the checks, after partial execution, contributed to its escape. Some courts go farther and protect a holder in due course under the same circumstances, although other refuse to do so and apply Sec 15 strictly in favor of the issuer and against the holder in due course, regardless of the formers negligence. The reason given by the latter courts in not treating the holder in due course and the drawee bank similarly is that the antecedent contract relations which exist between a depositor and his bank operate to impose a duty of care upon the depositor, but, because the holder in due course is free to refuse the instrument without risk to himself, there is no duty owed by an obligor on a negotiable instrument to use care in the custody of the instrument after partial execution. In this connection, note that Sec 15 uses the word any holder, thus impliedly excluding any one who is not a holder as defined by NIL. A drawee is not such a holder 10. Incomplete instrument which has been delivered Sec. 14. BLANKS, WHEN MAY BE FILLED. Where the instrument is wanting in any material particular, the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. And a signature on a blank paper delivered by the person making the signature in order that the paper may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any amount. In order, however, that any such instrument, when completed, may be enforced against any person who became a party thereto prior to its completion, it must be filled up strictly in accordance with the authority given and within a reasonable time. But if any such instrument after 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

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11. consideration Sec. 28. EFFECT OF WANT OF CONSIDERATION. Absence or failure of consideration is matter of defense as against any person not a holder in due course; and partial failure of consideration in a defense pro tanto whether the failure is an ascertained and liquidated amount or otherwise This provision reiterates the rule laid down by Sec 24 that every instrument is deemed prima facie to have been issued for a valuable consideration. It is also consistent with the provision that the validity and negotiable character of an instrument is not affected by the fact that it does not specify that any value has been given therefore. Under these rules, the defendant has the burden of proving that there was no consideration for the instrument. But Sec 28 goes farther for it in effect provides that absence or failure of consideration is a personal defense available only against holders not in due course. In the hands of a holder in due course therefore, the presumption of consideration is conclusive. The acceptability of negotiable instruments would be greatly restricted if prospective purchasers were burdened with the need of determining whether such instruments are supported by consideration Absence of consideration means total lack of consideration. For example, Andoy makes a promissory note payable to Paolo as a gift; there is absence of consideration. As between Andoy and Paolo, there can be no recovery on the note. But if Paolo negotiates it to Juno, a holder in due course, Juno can recover against Andoy, because Andoys defense of absence of consideration is personal Failure of consideration means that something was agreed upon as consideration for a contract but for some reason the consideration did not materialize. For example, Andoy enters into a contract to sell certain merchandise to Paolo. In consideration of this merchandise, Paolo makes a promissory note payable to Andoy as advance payment therefore. Andoy fails to deliver the merchandise. There is failure of consideration, so that Andoy cannot recover from Paolo. If Paolo negotiates the note to Juno, who knew that Andoy failed to deliver, neither can Juno recover from Andoy. If Juno were ignorant of such defense and is a holder in due course, Juno can recover from Andoy. Partial failure of consideration means simply that part of the consideration did not materialize. In the example above, if Andoy delivered part of the merchandise and failed to deliver the rest, there is a partial failure of consideration which may be set up as a defense pro tanto by Paolo against Andoy or a holder not in due course i.e., Paolo is not liable to the extent of the price of the undelivered portion

requirements necessary to make it a negotiable instrument, since otherwise it would not be such an instrument. Whether it is an incomplete instrument or a mere signed blank paper therefore, the authority extends to the insertion of the date, place of payment, the amount, the name of the payee and the time of payment. While Sec 14 is broad enough to include the matter of filling in blanks for the time of payment, Sec 13 deals with more particularity on some aspects of this right. It provides: Sec. 13. WHEN DATE MAY BE INSERTED. Where an instrument expressed to be payable at a fixed period after date is issued undated, or where the acceptance of an instrument payable at a fixed period after sight is undated, any holder may insert therein the true date of issue or acceptance, and the instrument shall be payable accordingly. The insertion of a wrong date does not void the instrument in the hands of a subsequent holder in due course; but as to him the date so inserted is to be regarded as the true date The insertion of a wrong date, by one having knowledge of the true date issue, will avoid the instrument as to him, but the innocent party may enforce the same notwithstanding the improper date. If an instrument is issued blank as to the payees name, the first or subsequent holder may insert his own name or the name of the person to whom he negotiates the instrument, unless there is express authority to the contrary. But unless authorized, he cannot fill in a predecessors name because that would entitle the holder compel his (predecessors) indorsement, thus enlarging the predecessors liability beyond the latters contract. He may however sue on the instrument without filling up the blank. In such a case, however, he cannot claim the rights of a holder in due course. The authority to fill in the blanks or to complete the instrument is limited as to time. According to Sec 14, in order to be enforceable against a party prior to completion, it must be filled in within a reasonable time. Such reasonable time must be reckoned from the time of the issuance of the instrument and not from the time of each successive negotiation, because the interest involved is that of the issuer. In determining what is a reasonable time, Sec 193 provides that regard is to be had to the nature of the instrument, the usage of trade or business (if any) with respect o such instruments, and the facts of the particular case. So no rigid rule can be laid down and each case will have to be considered individually. However, it should be noted that whether unreasonable time has elapsed or not would be immaterial, if the user had expressly fixed the time within which completion may be made

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Notes on Campos Chapter 5: Liability of Parties 1. liability of primary parties a. in general

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b. liability of maker Sec. 60. LIABILITY OF MAKER. The maker of a negotiable instrument by making it engages that he will pay it according to its tenor, and admits the existence of the payee and his then capacity to indorse Under the same provision, a maker is undoubtedly a party primarily liable as defined in Sec 192, for he engages to pay the note according to its tenor, subject to no condition whatever. The term maker applies only to the promissory note. By executing a note, a maker warrants that the payee named in the instrument is existing. He cannot therefore deny his liability on the ground that no such payee in fact exists. Thus, he cannot be heard to question, for example, the corporate existence of the payee By signing the note, the maker also represents to the world that the payee named has the capacity to indorse at the time of the making of such note and thus represents that the named payee can transfer a good and valid title to the note by indorsement. The maker is therefore precluded from setting up such defenses as minority or insanity of the payee or ultra vires act of a payeecorporation c. status of drawee prior to acceptance or payment; effect of stop order

Sec. 192. PERSON PRIMARILY LIABLE ON INSTRUMENT. The person primarily liable on an instrument is the person who by the terms of the instrument is absolutely required to pay the same. All other parties are secondarily liable. Sec. 70. EFFECT OF WANT OF DEMAND ON PRINCIPAL DEBTOR. Presentment for payment is not necessary in order to charge the person primarily liable on the instrument; but if the instrument is, by its terms, payable at a special place, and he is able and willing to pay it there at maturity, such ability and willingness are equivalent to a tender of payment upon his part. But, except as herein otherwise provided, presentment for payment is necessary in order to charge the drawer and indorsers. From the point of view of liability, parties to a negotiable instrument are classified into: (1) primary party, and (2) secondary party. Parties primarily liable: - maker of a promissory note - acceptor of a bill - drawee if until and unless he accepts, thus he becomes an acceptor Parties secondarily liable: - the indorsers of both note and bill - drawer of bill Main distinction between a primary party and a secondary party is that the former is unconditionally liable while the latter is conditionally liable. Being unconditionally liable, the primary party is duty-bound to pay the holder at the date of maturity, whether or not the holder demands payment from him, and he is not relieved from liability even if the instrument should become overdue due to the failure of the holder to make such demand. On the other hand, a party secondarily liable is not bound to pay unless the following conditions have been fulfilled: - due presentment or demand to the primary party for payment or acceptance - its dishonor by such party - the taking of proceedings required by law after dishonor i.e., notice of dishonor to the secondary party and, in cases of foreign bills of exchange, protest of the bill

Sec. 127. BILL NOT AN ASSIGNMENT OF FUNDS IN HANDS OF DRAWEE. A bill of itself does not operate as an assignment of the funds in the hands of the drawee available for the payment thereof and the drawee is not liable on the bill unless and until he accepts the same Sec. 189. WHEN CHECK OPERATES AS AN ASSIGNMENT. A check of itself does not operate as an assignment of any part of the funds to the credit of the drawer with the bank, and the bank is not liable to the holder, unless and until it accepts or certifies the check. The drawee is the person on whom a bill of exchange or check is drawn and who is ordered to pay it. He is not liable on the instrument until he accepts it, and even a holder in due course cannot sue him on the instrument before his acceptance. The mere issuance of the bill does not make the drawee liable thereon because it does not operate as an assignment of the funds in the hands of the drawee. Once a bill is accepted, however, the acceptor becomes primarily liable on the instrument under Sec 62. the presumption is that every bill of exchange is drawn on account of some indebtedness from the drawee to the drawer, and that the acceptance is an appropriation of the funds of the latter in the hands of the former.

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becomes primarily liable thereon, for then he engages to pay it according to the tenor of his acceptance, subject to no condition whatever. He cannot refuse to pay the holder on the ground of forgery of the drawers signature since he admits its genuineness. Neither can he refuse to pay a holder in due course on the ground of absence of consideration or other personal defense existing between the acceptor and the drawer. The question as to the meaning of according to the tenor of his acceptance and the admission of the existence of the payee has given rise to conflict Before the adoption of the Uniform NIL, the common law rule was that an acceptor of an altered check was not liable thereon to the innocent holder except for the original amount, and a paying acceptor or drawee was allowed to recover the excess. The common law rule has been followed by the majority of the courts under the NIL Following the majority view, where the alteration consists in raising the amount payable under the instrument, the acceptor would be liable to a holder in due course only as to its original amount. If he pays before knowledge of the alteration, he may subsequently recover the difference between the altered and original amount. If the person who received payment is not a holder in due course, the acceptor would be able to recover the whole amount paid, because under Sec 124, the instrument was avoided by the alteration, thus payment by the acceptor was a mistake. If the instrument altered is a check, would the drawee bank that has accepted or paid have the right to charge the drawers account? If the person who cashed the check is a holder in due course, it is obvious that the bank can charge the drawers account but only with the original, not the altered amount. The difference can be recovered by the bank from the last holder. If the latter is not a holder in due course, then the bank cannot charge the drawers account at all because the instrument has been avoided by the alteration. The bank may however recover from the holder who under Sec 124 was not entitled to payment If the alteration is of the payees name, the paying bank cannot charge the drawers account with the amount of the check because its duty is to pay only according to the order of the drawer. Having paid to the wrong person, it did not comply with its duty and cannot now charge the drawer. But under the prevailing view, the bank can recover the amount it had paid from the recipient thereof.

Similarly, a drawee bank is not liable on the check until it accepts or certifies the same. Before payment or certification by the bank the drawer of the check may countermand the order, and payment thereafter to the payee by the bank is wrongful. Since a check is not an assignment of the drawers funds, the bank is liable to him for paying it in disregard of the countermand, unless the payment discharged a legitimate obligation of the drawer. On the other hand, since the bank is under no legal obligation to the holder of an unaccepted and uncertified check, its payment of such check is voluntary and cannot be recovered from a bona fide holder n the ground that the drawer had previously countermanded payment. When a drawer of a check countermands payment by issuing a stop order to the drawee bank, the latter usually requires the drawer to sign a waiver of the banks liability should it pay due to oversight or inadvertence. The validity of such a waiver has been questioned before various American courts, and opinions are conflicting. So far, the question has not been raised before the Supreme Court A bill of exchange presupposes a debtor-creditor relationship between the drawer and the drawee. Thus, although a drawee is not liable to the holder until and unless he accepts, the drawee that refuses to accept may, under some circumstances, be made liable to the drawer for breach of contract or for damages based on tort. If the drawee, for a certain consideration, had previously promised the drawer that he would honor the latters bill, unjustified refusal to accept will be a breach of the promise. Thus, if a bank refuses without just reason to honor a check of one of its depositors although the latter has sufficient funds with it to cover the check, the drawer may recover from the bank damages for any injury suffered by him, including that to his credit or reputation d. liability of acceptor Sec. 62. LIABILITY OF ACCEPTOR. The acceptor by accepting the instrument engages that he will pay it according to the tenor of his acceptance; and admits: 1. the existence of the drawer, the genuineness of his signature and his capacity and authority to draw the instrument; and 2. the existence of the payee and his then capacity to indorse Negotiable instruments are payable either immediately or at some future time. If a bill of exchange is payable immediately, it will be presented to the drawee for payment; on the other hand, if payable at some future time, the bill of exchange may be presented to the drawee for acceptance before its due date. As pointed out earlier, a drawee has no liability on the bill until and unless he accepts the same. Once he accepts, he

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Notes on Campos 2. formal requisites of acceptance

Negotiable Instruments Law


negotiability by the mere fact that its maturity date has passed or that the drawee has refused to accept or pay it. a. constructive acceptance

Sec. 191. DEFINITIONS AND MEANING OF TERMS. In this Act, unless the context otherwise requires Acceptance means an acceptance completed by delivery or notification XXX Sec. 132. ACCEPTANCE; HOW MADE, ETC. The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer. The acceptance must be in writing and signed by the drawee. It must not express that the drawee will perform his promise by any other means than the payment of money. Sec. 133. HOLDER ENTITLED TO ACCEPTANCE ON FACE OF THE BILL. The holder of a bill presenting the same for acceptance may require that the acceptance be written on the bill, and if such request is refused, may treat the bill as dishonored. Sec. 138. ACCEPTANCE OF INCOMPLETE BILL. A bill may be accepted before it has been signed by the drawer, or while otherwise incomplete, or when it is overdue, or after it has been dishonored by a previous refusal to accept, or by non-payment. But when a bill payable after sight is dishonored by non-acceptance and the drawee subsequently accepts it, the holder, in the absence of any different agreement, is entitled to have the bill accepted as of the date of the first presentment Acceptance applies only to bills of exchange and its object is to bind the drawee and make him an actual and bound party to the instrument Under Sec 132, the requisites for a valid acceptance are: (1) it must be in writing; (2) it must be signed by the drawee; and (3) it must not change the implied promise of the acceptor to pay only in money. Thus, there can be no valid oral acceptance nor an implied acceptance, except under Sec 137 (constructive acceptance). Although it is not an essential requisite that the acceptance be made on the instrument itself, in case of refusal of the drawee to do so, the holder has the option to treat the bill as dishonored and go against the persons secondarily liable the drawer and the indorsers Acceptance is usually made by writing the word accepted and signing immediately below. However, the drawees signature alone is sufficient Although a bill is usually accepted a reasonable time after execution, Sec 138 allows acceptance to be made while it is incomplete. This section does not mean that one to whom the bill is transferred while incomplete may become a holder in due course. Under the same section, a bill may be accepted even after it is overdue or dishonored, since an instrument does not lose its

Sec. 136. TIME ALLOWED DRAWEE TO ACCEPT. The drawee is allowed twenty-four hours after presentment in which to decide whether or not he will accept the bill; but the acceptance, if given, dates as of the day of presentation Sec. 137. LIABILITY OF DRAWEE RETAINING OR DESTROYING THE BILL. Where a drawee to whom a bill is delivered for acceptance destroys the same, or refuses within twenty-four hours after such delivery, or within such other period as the holder may allow, to return the bill accepted or non-accepted to the holder, he will be deemed to have accepted the same Sec. 150. DUTY OF HOLDER WHERE BILL NOT ACCEPTED. Where a bill is duly presented for acceptance and is not accepted within the prescribed time, the person presenting it must treat the bill as dishonored by non-acceptance or he loses the right of recourse against the drawer and indorsers The drawee has 24 hours after presentment within which to make up his mind whether to accept the bill or not. The 24-hour period is counted from delivery and not from demand for the return of the bill. Should he return it unaccepted within 24 hours, the bill is not necessarily dishonored because he can still accept it until the expiration of the 24th hour. Should he return it before the 24-hour period, and fails to accept within such period or within such other period as the holder may allow, the holder must treat the bill as dishonored or else he will lose his right against prior parties. If the drawee returns it with a statement of refusal to accept, then even if the 24 hour period has not lapsed, the bill should then be considered as dishonored. If he destroys the bill instead of returning or accepting it, the law considers the bill as accepted, unless the destruction is accidental or otherwise not willfully done. If demand is made on him to return the bill within the prescribed period and he refuses to return it, there is also a constructive acceptance. Suppose there is no demand for the return of the bill and the drawee keeps it until after the expiration of said period without expressly accepting or refusing it, will he be deemed to have accepted? One view is that mere failure to accept within the prescribed time even without previous demand for the return of the bill constitutes constructive acceptance. However, the view that such inaction on the part of the drawee is not acceptance but a dishonor of the bill finds legal support. Sec 137 uses the word refuses which clearly implies a previous demand for the return of the bill. Sec 150 declares that if no acceptance is given within the prescribed time, it is the duty of the holder to consider it

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sometimes referred to as an extrinsic acceptance and the second is a virtual acceptance. Since in either case, the acceptance appears in an instrument separate from the bill, to be operative it must identify the bill to which the acceptance refers, and must be clear and unequivocal. Thus, where the payee of checks before taking them telegraphed to the drawee, Will you pay X Company check, fifty nine hundred odd dollars? and the drawee replied, Forward your checks. They will undoubtedly be taken cared by the company when presented, and the payee took the checks on reliance thereon, it was held that the drawee was liable to the payee as an acceptor Sec 134 requires that the acceptance be shown and the purchaser take the bill for value on the faith of such acceptance. Thus, a letter from the drawee to the drawer accepting a draft is not binding in favor of one who never saw the letter or advanced money on the faith of it. Reliance, however, is a more important requisite than physical exhibition of the instrument bearing the acceptance. It is believed that provided the purchaser knew of the acceptance and relied on it, the mere fact that it was not actually shown to him should not be sufficient to free the acceptor from liability. Note that the requirement of physical exhibition is not present in the case of the acceptance of a future bill What is the effect of the reliance on an extrinsic or virtual acceptance on subsequent holders who have no knowledge of the acceptance? It has been suggested that such subsequent holders should acquire the rights of the relying party from whom they take the instrument, applying the general principles laid down in Sec 58 and Sec 49, although neither section applies directly to the situation Although the acceptance of a bill may be conditional, an acceptance of a future bill must be unconditional, otherwise it will not be considered an acceptance. Thus, a collateral writing stating that the defendant is authorizing A to make sight drafts if necessary for commissions due from time to time as they accrue is not an acceptance under Sec 135, because the agreement is conditional. 4. kinds of acceptance a. general acceptance

as dishonored. This latter section runs counter to the interpretation given by the opposite view to Sec 137 that mere inaction is equivalent to acceptance. However, American courts which follow the view that mere failure to return without a previous demand therefore constitutes acceptance, do not apply Sec 137 to checks, on the ground that it expressly refers to delivery of the bill for acceptance. A check is presented for payment rather than for acceptance It will be recalled that under the clearing house rules, the drawee bank to whom check has been sent for clearing by another bank, must return it not later than 4 p.m. the day after it was presented for clearing. Otherwise, it will be deemed cleared and the collecting bank may thereafter pay the check to the holder-depositor. In other words, failure to return within the prescribed time will be deemed payment or acceptance of the check. The clearing house regulations have the effect of an agreement between the banks which use the facilities of the clearing house. This conclusion does not necessarily run counter to Sec 137 even if this provision is interpreted to include only refusal and not mere failure to return. Although it may be argued that a regulation cannot override an express provision of the NIL, it is also true that a bank may waive its right under such provision, and it so waives such right by its agreements Acceptance, if given, will retroact to the date of presentation. Thus, if a bill is payable ten days after sight, and it is presented at 10 a.m. on June 1, the drawee has up to 10 a.m. June 2 to accept the bill. If he accepts the bill on June 2, the date of maturity will fall on June 11 and not on June 12. See case: Sumcad, et. al v. The Province of Samar, et. al. 52 OG 18, 7582 (1956) 3. acceptance on a separate instrument

Sec. 134. ACCEPTANCE BY SEPARATE INSTRUMENT. Where an acceptance is written on a paper other than the bill itself, it does not bind the acceptor except in favor of a person to whom it is shown and who, on the faith thereof, receives the bill for value Sec. 135. PROMISE TO ACCEPT; WHEN EQUIVALENT TO ACCEPTANCE. An unconditional promise in writing to accept a bill before it is drawn is deemed an actual acceptance in favor of every person, who, upon the faith thereof, receives the bill for value. An acceptance in order to be binding need not be written on the instrument itself but may be written on a separate instrument as in a letter or by telegram. An acceptance on a separate paper may be either an acceptance of an existing bill or an acceptance of a future bill. The first is

Sec. 139. KINDS OF ACCEPTANCE. An acceptance is either general or qualified. A general acceptance assents without qualification to the order of the drawer. A qualified acceptance in express terms varies the effect of the bill as drawn Sec. 140. WHAT CONSTITUTES A GENERAL ACCEPTANCE. An acceptance to pay at a particular place is a general acceptance unless it expressly states that the bill is to be paid there only and not elsewhere

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iv. as to time A bill payable thirty days after date is accepted thus: Accepted, payment to be made six months from date v. as to drawee If the bill is addressed to three drawees and only one of them should accept, it is treated as qualifiedly accepted. A holder need not take a qualified acceptance but instead may insist on a general unqualified acceptance, and upon his failure to obtain the latter, may treat the bill as dishonored. However, if he agrees to a qualified acceptance, he should give notice thereof to the drawer and indorsers, otherwise the latter will be discharged from liability. If notified and they do not express their dissent within a reasonable time, they remain liable on the instrument If the holder took the instrument after it has been accepted qualifiedly, he will be deemed to have assented to such acceptance. c. trade acceptance

Sec. 141. QUALIFIED ACCEPTANCE. An acceptance is qualified, which is: 1. conditional, that is to say, which makes payment by the acceptor dependent on the fulfillment of the condition therein stated; 2. partial, that is to say, an acceptance to part only of the amount for which the bill is drawn; 3. local, that is to say, an acceptance to pay only at a particular place; 4. qualified as to time; 5. the acceptance of some one or more of the drawees, but not of all. Sec. 142. RIGHTS OF PARTIES AS TO QUALIFIED ACCEPTANCE. The holder may refuse to take qualified acceptance, and if he does not obtain an unqualified acceptance, he may treat the bill as dishonored by non-acceptance. Where a qualified acceptance is taken, the drawer and indorsers are discharged from liability on the bill, unless they have expressly or impliedly authorized the holder to take a qualified acceptance, or subsequently assent thereto. When the drawer or an endorser receives notice of a qualified acceptance, he must within a reasonable time express his dissent to the holder or he will be deemed to have assented thereto. i. conditional If the acceptance reads: Will pay as soon as proceeds of sale of palay are available, it would be conditional. Since the condition does not qualify the order to pay but only the acceptance, the instrument is still negotiable and does not violate Sec 1(b). As long as the bill of exchange conforms with the NIL definition, it is negotiable. The nature of acceptance is important only in determining the kind of liabilities of the parties involved, but not the determination of whether it is negotiable bill of exchange or not ii. partial A bill of exchange for P5,000 is accepted thus: Accepted for P2,000 only. Note that a partial acceptance does not affect the negotiability of the instrument, unlike a partial indorsement which under Sec 32 does not operate as a negotiation of the instrument. iii. local Although Accepted, payment to be made at the PNB: is a general acceptance under Sec 140, Accepted payment to be made at the PNB only is an acceptance qualified as to place of payment

A trade acceptance is a draft or bill of exchange with a definite maturity, drawn by a seller on a buyer for the purchase price of goods, bearing across its face the acceptance of the buyer. It is usually payable to order. It is used in transaction where goods are brought from a wholesaler and the latter, instead of taking the buyers promissory note, executes a time bill on the buyer, who writes Accepted across the bills face and signs it. Its use is generally limited to domestic transactions The trade acceptance differs from an ordinary bill of exchange in that it always states upon its face the transaction from which it arose. Furthermore, a trade acceptance is confined to sale of goods and has a fixed date of maturity, while an ordinary bill may cover any kind of transaction and may be payable on demand or at a fixed or determinable future time. Because it arises in a current sales transaction between merchants, it is usually easier to raise money on it than on an ordinary bill of exchange or draft which might arise from a stale debt of a less commercial nature d. bankers acceptance A bankers acceptance is a negotiable time draft or bill of exchange drawn on and accepted by a commercial bank. It is more versatile and more popular than the trade acceptance as it is used not only in domestic transactions but even more so in international trade for financial, import and export transactions. Unlike the trade acceptance, which is accepted by the buyer, a bankers

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in other negotiable instruments, the check operates only as a conditional payment and payment will be considered absolute only when the check has been honored by the bank either by payment or by certification. The drawee bank has no obligation to the holder to pay or accept the check. However, its refusal to pay may give rise to its liability to the drawer under its contract with the latter. The Supreme Court, in an 8 to 7 decision, has held that payment by check will not extinguish a judgment debt where it is made payable not to the judgment creditor but to the sheriff, who later absconds with the funds. However, it has also been held that in case of redemption of property sold under execution, a tender of payment within the prescribed period, of the redemption price by check which was accepted by the sheriff, constitutes a valid exercise of the right of redemption, without prejudice to the actual payment of the purchase price. Redemption, according to the Court, is a right and not an obligation, and thus not covered by Article 1249 of the Civil Code. Besides the personal check, there are other kinds of checks. A cashiers check or managers check is one which is drawn by a bank on itself, and its issuance has the effect of acceptance. Since the drawer and drawee are the same, the holder may treat it either as a bill of exchange or as a promissory note. The bank may therefore be held primarily liable as the maker of the note. It is used in transactions involving persons who hardly know each other and where one would have no reason to trust the personal check of another. It is not legal tender however, and does not operate as payment until it has been honored by the bank. A memorandum check is one where the word memorandum or memo is written across its face, signifying that the drawer will pay the holder absolutely, without the need of presentment. It is drawn on a bank and thus has the same effect as an ordinary check, and if passed to a third person, will be valid in his hands like any other check. Although it need not be presented at the bank, if it is so presented, it is generally accepted by the bank A travelers check is a negotiable instrument upon which the holders signature must appear twice on the instrument first when it is issued and again when it is cashed. It is used by travelers as the safest and most convenient substitute for money. It is usually payable anywhere in the world, acceptable not only to banks, but also to hotels, restaurants, stores, steamship and airline companies. The travelers check is first signed by the purchaser thereof in the presence of the issuer at the time of issuance. In order to be effective, he has to countersign it at the time he wants to pay for his fare, his hotel bill, etc. This procedure is the purchasers insurance against use by unauthorized persons

acceptance is drawn on and accepted by a bank. Like the trade acceptance, it differs from other bills in that it specifies the transaction which gave rise to it A bankers acceptance is conveniently used when the buyer and seller are not known to each other and credit references are difficult to obtain. The acceptance substitutes the banks credit for that of the unknown firm. Furthermore, it permits the seller to receive immediate payment for the goods sold while the buyer need not tender payment until the goods are received. The accepting bank is unconditionally and irrevocably liable to pay the holder at maturity. It is unable to pay, the drawer and the indorsers will be secondarily liable The bankers acceptance, like the trade acceptance, is fast being replaced by the letter of credit 5. checks a. definition; nature and kinds

Sec. 185. CHECK DEFINED. A check is a bill of exchange drawn on a bank payable on demand. Except as herein otherwise provided, the provisions of this Act applicable to a bill of exchange payable on demand apply to a check Sec. 63. LEGAL CHARACTER. Checks representing deposit money do not have legal tender power and their acceptance in the payment of debts, both public and private, is at the option of the creditor: Provided, however, that a check which has been cleared and credited to the account of the creditor of cash in an amount equal to the amount credited to his account (R.A. 265, Central Bank) A check is an instrument which is in the form and nature of a bill of exchange, but unlike an ordinary bill it is always payable on demand and always drawn on a bank. If negotiable in form, then a check is a negotiable instrument subject to the same rules as the latter. Like an ordinary bill of exchange, it must contain an order, which must be unconditional; and the order must be for the payment of money, the amount of which must be definite and certain. It may be transferred by indorsement or by delivery, depending on whether it is payable to order or to bearer. Unlike the ordinary bill, however, it is always payable on demand and not at some future date. Like in other negotiable instruments, the drawer contracts that the bank will pay on due presentment and that if dishonored and the necessary proceedings on dishonor are duly taken, he will pay the amount of the check to the holder Payment by check is deemed convenient by many persons, businessmen and non-businessmen alike. But as

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the bank. There is no reason therefore to continue the liability of the drawer and the indorsers whose representations that the drawee bank would pay have been met. The acceptance of an ordinary bill, even if given at the request of the holder, does not release the secondary parties who remain liable should the acceptor later fail to pay. An ordinary drawee is, unlike a bank, not a depositary of cash. Where the certification is obtained at the request of the drawer, the secondary parties are not released. In such a case, any personal defense of the drawer against the payee would be available to the certifying bank against all holders not in due course. But if certification was obtained by the holder, a personal defense of the drawer against the payee would not be available to the bank even against holders not in due course. Consequently, a stop order given by the drawer where the check was certified at the request of the holder is inoperative. On the other hand, where the certification was obtained by the drawer, any stop order later issued by him would be effective to prevent the bank from paying the check. Sec 188 in providing for the release of secondary parties where the holder procures certification, applies only to indorsers at the time of certification and not to those who indorse subsequent to such certification Since certification is equivalent to acceptance a bank which has certified a check whether at the request of the holder or of a drawer, has the same liabilities and makes the same warranties as an acceptor under Sec 62. it cannot, after certification, question the genuineness of the drawers signature. If it discovers that such signature is forged subsequent to certification but prior to payment, it cannot refuse to pay on the ground of forgery. If its discovery comes after it has paid the check, it cannot recover back what it paid on the ground of mistaken payment unless the holder is guilty of fraud or negligence. As against an innocent holder, it is bound to know the signature of its depositors, and its act of payment is an act which admits the genuineness of the drawers signature. In such a case, however, it may not charge the account of the drawer whose signature was forged because the drawer never gave it any order to pay See case: New Pacific Timber & Supply Co. Inc. v. Seneris L-41764, Dec 19, 1980; 101 SCRA 686 c. distinction between surrender of check upon payment and negotiation

See case: Republic v. PNB, et. al. L-16106, Dec 30, 1961; 3 SCRA 851 See case: Mesina v. IAC L-70145, Nov 13, 1986; 145 SCRA 499 b. certification and its effects Sec. 187. CERTIFICATION OF CHECK; EFFECT OF. Where a check is certified by the bank on which it is drawn, the certification is equivalent to an acceptance Sec. 188. EFFECT WHERE THE HOLDER OF A CHECK PROCURES IT TO BE ACCEPTED OR CERTIFIED. Where the holder of a check procures it to be accepted or certified, the drawer and all indorsers are discharged from liability thereon. Sec. 189. WHEN CHECK OPERATES AS AN ASSIGNMENT. A check of itself does not operate as an assignment of any part of the funds to the credit of the drawer with the bank, and the bank is not liable to the holder, unless and until it accepts or certifies the check. Certification of a check is an agreement by which a bank promises to pay the check at any time it is presented for payment. Prior to certification, a bank is not liable to the holder of the check with whom he has no privity. Neither is it obliged to the depositor-drawer to certify checks, for its agreement with him is to pay the check. But once given, certification is equivalent to an acceptance in that it imposes primary liability upon the certifying bank. Thus, the Supreme Court has held that payment of a judgment obligation by way of a certified check is sufficient to prevent the sale at auction of the defendants properties to satisfy such obligation. As in acceptance, certification must be in writing, but may be made on the check itself or on another instrument. No particular words are necessary and the word certified followed by the date and signature of the proper bank officer is sufficient. Unlike refusal to accept the bill however, refusal to certify a check does not constitute dishonor, and the holder cannot at that stage exercise his right of recourse against the drawer and the indorsers. Such right can only arise if the bank refuses to pay the check on demand to the holder. However, although a bank is not liable to the holder prior to certification, its refusal to pay may give rise to a liability for damages in favor of the drawer. Although certification is equivalent to acceptance, its effects differ on some points from those of acceptance. Where the check is certified at the request of the holder, the bank becomes a solitary debtor and the drawer and indorsers are discharged. A certified check circulates as representing so much cash in the bank payable on demand to the holder. It is as if the bank had paid the holder in cash, and the latter had deposited the same with

A check presupposes a debtor-creditor relationship between the drawee bank and the drawer, by virtue of which the bank has the duty to pay the check to the holder. The delivery of the check by the holder to the drawee bank is not negotiation. The holder is not transferring title to the instrument but is merely

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drawee bank. The collecting bank then credits it to the account of the depositor. A similar procedure is followed for checks drawn against banks outside Metro Manila, where there are regional clearing houses It is possible however that defects in a check cannot possibly be detected by the drawee bank until it has returned the cancelled check to the drawer and the latter has informed it of the defect. If the defect is a forgery of the drawers signature, under Sec 23, the drawee bank cannot charge the amount against the drawers account and under Sec 62, neither can it get it back from the collecting bank. If the defect consists in a forged indorsement, the drawee bank cannot charge the drawers account but can recover the amount of the check from the collecting bank, subject to the clearing house rules. If the defect consists of a material alteration, although under Sec 124 the drawee bank cannot charge the drawers account, there are strong conflicting views as to whether the drawee bank can recover from the collecting bank and that considering our law, rules and jurisprudence on the matter, the majority view prevails here, i.e., that the drawee bank can recover provided it acts within the period prescribed by the clearing house rules. 6. liability of secondary parties

demanding that the bank discharge its contractual obligation to the holder. By paying the check, the drawee bank extinguishes it as a negotiable instrument and converts it into a mere voucher. It does not become the holder of the check. Any signature required of the holder by the drawee bank is therefore not an indorsement but a mere acknowledgement of receipt of payment of such check. The holder, by such signature, does not therefore assume the liabilities of an indorser. The above situation should be distinguished from the deposit of a check by the holder thereof in a bank other than the drawee bank. In this case, a signature on the back of the check would constitute indorsement, unless otherwise indicated. In this situation, the holder is negotiating the check to the depositary bank, which in turn will collect on the check from the drawee bank, through the clearing house d. clearing of checks At this point, a brief description of the process for the collection of checks would be helpful. Since much of todays business is carried on through checks, promptness in their collection is not only desirable but essential. The check collection process is referred to as clearing. In the Metro Manila area, the Central Bank has a clearing house where representatives of the different banks meet every afternoon of every business day. Each representative carries with him all the checks presented to his bank for deposit during that day, except of course those drawn on his own bank. The checks are sorted and placed in different envelopes labeled with the name of the bank against which they are drawn. These envelopes are then given to the respective representatives of the different drawee banks, and each one of them receives all checks deposited on that day which are drawn against the bank he represents. These checks are then brought back by such representatives to their respective banks for examination and clearance. If it is found that the respective drawers of the checks have sufficient funds to cover them and such checks are not otherwise defective, they are cleared. Those found defective or not backed up by sufficient funds are returned to the collecting banks representative the next clearing day. In the meantime, that the check has not been cleared, the depositor thereof cannot withdraw from his bank (which would be the collecting bank) the amount represented by such check. The banks are given by the Central Bank a definite period within which to return defective checks and any check not so returned will be considered cleared. It is at this point therefore that the check can be referred to as paid. Usually, no cash will pass from the drawee bank to the collecting bank, and the latter merely charges the amount of the cleared check against the account of the

Sec. 70. PRESENTMENT FOR PAYMENT; EFFECT ON PARTIES. xxx. But except as herein otherwise provided, presentment for payment is necessary in order to charge the drawer and indorsers. The parties secondarily liable on the instrument are the drawer and the indorsers. As to them, liability is contingent on presentment and notice of dishonor, without which they are not liable at all. Presentment means that the instrument is presented at maturity to the party primarily liable for the purpose of obtaining payment thereof. Without this presentment, the secondary parties cannot be held liable should the primary party have refused to pay upon such presentment a. liability of drawer

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

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case exceed Two Hundred Thousand Pesos, or both such fine and imprisonment at the discretion of the court. The same penalty shall be imposed upon any person who having sufficient funds in or credit with the drawee bank when he makes or draws and issues a check, shall fail to keep sufficient funds or to maintain a credit to cover the full amount of the check if presented within a period of ninety days from the date appearing thereon, for which reason it is dishonored by the drawee bank Where the check is drawn by a corporation, company or entity, the person or persons who actually signed the check in behalf of such drawer shall be liable under this Act. There are 2 acts covered by the above provision: (1) making or drawing and issuing a check knowing at the time of issue that the drawer has no sufficient funds or credit with the drawee bank, and (2) failure to keep sufficient funds or credit to cover the check for a period of 90 days from the date of said check. In both cases, the drawee bank must have dishonored the check for insufficiency of funds or credit. Under paragraph 1 covering the first kind of offense, an essential element is that the drawer must have had knowledge of such insufficiency at the time he issued the check. Provided it is presented within 90 days from its issuance, the drawing and issuance of a check is prima facie evidence of the drawers knowledge of insufficiency of funds, unless he pays the holder the amount due on the check within 5 banking days after receiving notice of its dishonor, or makes arrangements for payment in full by the drawee of such check within the same period. It should be noted that payment or arrangements for payment within the 5-day period does not erase criminal liability but merely prevents the issuance of the check form being prima facie evidence of knowledge of insufficiency of funds. Such knowledge can still be proved by other evidence. In dishonoring the check, the bank is duty bound to stamp or write on said check the reason for dishonor, and must in addition state in the notice of dishonor (which is separate from the check) that there are no sufficient funds or credit for the payment of the check. The check, with the stamp or writing giving the reason for dishonor, shall constitute prima facie evidence of the issuance of the check, its due presentment to and subsequent dishonor by the drawee bank, as well as of the reason of dishonor. If the bank dishonors the check giving as its reason a stop payment order of the drawer, when in fact the latters funds were insufficient, criminal liability would still arise, unless there was a valid reason for the stop payment order, i.e., fraud on the part of the payee. In this connection, the Supreme Court has held that the act

The liability of a drawer is conditional. He agrees to pay the bill only in the event certain conditions are complied with, to wit: (1) presentment, (2) dishonor of the instrument, and (3) the taking of the necessary proceedings for dishonor. Such proceedings are: (1) protest, in the case of foreign bills, and (2) notice of dishonor to the drawer The drawer, just as the maker of the note, warrants the existence of the payee and the latters capacity to indorse the instrument at the time of its issuance. He cannot therefore avail of such defenses as lack of corporate personality or minority on the part of the payee. However, where at the request of a swindler the drawer makes drafts payable to persons not known by him to be fictitious, he does not warrant the capacity of the swindler to indorse the names of the fictitious payee See case: PNB v. Picornell, et. al. 46 Phil 716 (1922) See case: Banco Atlantico v. Auditor General L-33549 Jan 31, 1978; 81 SCRA 335 b. criminal liability for checks i. under B.P. 22 bouncing

When a check is dishonored by the drawee bank for lack or insufficiency of the drawers funds, it is said to have bounced. Aside from the civil liability which the drawer of the check may incur under the NIL, he may be held criminally liable under the Bouncing Checks Law (B.P. No. 22), and/ or under Article 315(2)(d) of the RPC The more recent of these laws is the Bouncing Checks Law which took effect on June 29, 1979. it was enacted as a reaction to the alarming increase in the number of worthless checks issued by unscrupulous persons in connection with their daily transactions, causing prejudice not only to the banking system, but even more so, to the smooth flow of business and trade. It was therefore in the public interest that a more comprehensive and definitive statute be passed to penalize such acts. Sec 1 B.P. No. 22 provides: Sec. 1. Checks issued without sufficient funds. Any person who makes or draws and issues any check to apply on account or for value, knowing at the time of issue that he does not have sufficient funds in or credit with the drawee bank for the payment of such check in full upon its presentment, which check is subsequently dishonored by the drawee bank for insufficiency of funds or credit or would have been dishonored for the same reason had not the drawer, without any valid reason, ordered the bank to stop payment, shall be punished by imprisonment of not less than thirty days but not more than one year or by a fine of not less than but more than double the amount of the check which fine shall in no

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Paragraph 2(d) of said Code, the following acts constitute the crime of estafa: By postdating a check, or issuing a check in payment of an obligation when the offender had no funds in the bank, or his funds deposited therein were not sufficient to cover the amount of the check. The failure of the drawer of the check to deposit the amount necessary to cover his check within three (3) days from receipt of notice form the Bank and/ or the payee or holder that said check has been dishonored for lack or insufficiency of funds shall be prima facie evidence of deceit constituting false pretense or fraudulent act. The crime covered being an act of estafa, deceit or fraud is an essential element thereof, in contrast to B.P. No. 22 where, although knowledge of insufficiency of funds is necessary, deceit is not an indispensable element. Under the above provision, if the drawer issued a postdated check thinking in good faith that he will have sufficient funds when the date comes, and informs the payee about it, and later, he is unable to make the deposit, he is not guilty of estafa. However, since he has knowledge of the insufficiency of his funds, he would be liable under B.P. No. 22, even if he had acted in good faith and without deceit. Before the enactment of B.P. No. 22, the Supreme Court held in several cases that the issuance of bouncing check for a preexisting obligation does not constitute estafa and is therefore not a crime under the RPC. However, B.P. No. 22 is quite clear and broad enough to cover all kinds of checks whether present of postdated, or whether issued in payment of a preexisting obligation or given in mutual or simultaneous exchange for something of value. It covers even foreign checks, provided they are either drawn and issued in the Philippines though payable outside, or made payable and dishonored in the Philippines though drawn and issued outside thereof.

of issuing a stop payment order with the knowledge that the drawer has no sufficient funds constitutes deceit for which the latter may be criminally liable under the RPC. The act covered by the second paragraph of Sec 1 does not require knowledge at the time of issue as it presupposes a situation where there may have been enough funds at the time of issue but the drawer withdraws the funds before the check is presented for payment so that at said time, his funds are no longer sufficient to cover it. The law provides a period of 90 days from the date appearing on the check within which such sufficiency of funds or credit should be maintained. If presentment is made after such period, there can be no criminal liability under this paragraph. Note that under the first paragraph, there is no period prescribed for presentment. The 90-day period should not be confused with the requirement of the NIL that a check must be presented within a reasonable time after its issue in order to charge the parties secondarily liable. The latter covers only civil and not criminal liability. Another element of both offenses is the requirement that the check was issued on account or for value. Though these words do not appear of the second paragraph, it seems safe to assume that the lawmakers intention was to apply the requirement to both. Under the NIL, value is any consideration sufficient to support a simple contract, and includes both a contract simultaneous with the issuance of the check, and preexisting obligation. In this sense, on account would have a similar meaning any claim arising out of an already existing contractual or other financial relationship, as well as one arising simultaneously with the issuance of the check. Credit as used in B.P. No. 22 means an arrangement or understanding with the bank for the payment of such check. Thus, although the drawer may not have sufficient funds at the time of presentment, if he has an existing arrangement with the bank that, for example, the bank would honor his checks up to a specified limit, regardless of the insufficiency of his funds, then there can be no criminal liability, if the amount of the check does not exceed such specified limit. The constitutionality of B.P. No. 22 has been assailed on various grounds, but in the case of Lozano v. Martinez, the Supreme Court upheld it as a valid exercise of police power ii. estafa under the RPC By express provision of B.P. No. 22, prosecution under the law is without prejudice to any liability for violation of any provision of the RPC. Under Article 315,

Where the check is issued for an obligation incurred simultaneously, and both knowledge and deceit (prima facie or otherwise) are present, there is violation of both the RPC and B.P. No. 22. and since it is well-settled that if each statute requires proof of an additional fact which the other does not, an acquittal or conviction under either statute does not exempt the defendant from prosecution or conviction under the other. Conviction under B.P. No. 22 will not preclude prosecution or conviction under the RPC. See case: Lozano v. Martinez L-63149 Dec. 18, 1986; 146 SCRA 323

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will be liable to all subsequent holders for a breach of any of his warranties. Under paragraph (a) Sec 65, one who negotiates by delivery or by qualified indorsement is liable to his transferee if the instrument is forged, based on his warranty that the instrument is in all respects what it purports to be. Material alteration would also be included under his warranty, for in that case, the instrument would not be genuine nor would it be in all respects what it purports to be. It is also submitted that Sec 65(b) would cover the real defense of nondelivery of an incomplete instrument. As a general rule, the warranties in Sec 65(a) could cover most real defenses as well as such personal defenses as would fall within the meaning of genuine and in all respects what it purports to be. The qualified indorser cannot plead any of these defenses because they are covered by the warranties implied from his sale of the negotiable instrument A transferor by delivery or by qualified indorsement in addition warrants that he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. The distinction between this warranty and the warranty under paragraph (a) is not clear. When would knowledge of the transferor be necessary to make him liable on an invalid or valueless instrument? If the defect of the instrument has nothing to do with the warranty, that is genuine and in all respects what it purports to be, then knowledge of such defect would be necessary to charge the transferee by delivery or by qualified indorsement. Thus, although such transferor does not warrant that the instrument will be paid or that prior parties are solvent, if he has knowledge of the insolvency of said parties, then he is liable under Sec 65 (d), for then he knows that the instrument is valueless. Likewise, an indorser without recourse who knows that the note was invalid for want of consideration is liable to the indorsee for breach of the warranty under Sec 65 (d) d. liability of a general or unqualified indorser Sec. 66. LIABILITY OF GENERAL INDORSER. Every indorser who indorses without qualification, warrants to all subsequent holders in due course: 1. the matters and things mentioned in subdivisions (a), (b) and (c) of the next preceding section; 2. that the instrument is at the time of his indorsement valid and subsisting 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 the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it

liability of qualified indorser and one negotiating by delivery

Sec. 65. WARRANTY; WHERE NEGOTIATION BY DELIVERY, ETC. Every person negotiating an instrument by delivery or by qualified indorsement, warrants: 1. that the instrument is genuine and in all respects what it purports to be; 2. that he has good title to it; 3. that all prior parties had capacity to contract; 4. that he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate transferee The provisions of subdivision (c) of this section do not apply to persons negotiating public or corporation securities, other than bills and notes A qualified indorsement is made by adding the words without recourse or words of similar import, to the indorsers signature, and constitutes the indorser a mere assignor of the title to the instrument Negotiation by delivery presupposes that no indorsement is necessary because the instrument is payable to bearer and therefore refers to the holder who passes the instrument in the same condition in which he received it, making no indorsement at all. Even if he did not sign the instrument, he would be liable under Sec 65. This is thus an exception to the rule in Sec 18 that no person is liable on an instrument unless he signed it. A negotiation by delivery alone should not be confused with negotiation by way of a blank indorsement A qualified indorser and one who negotiates by mere delivery, do not undertake to pay the instrument in the event of its dishonor. The purpose of the negotiator in these two cases is to pass title to the instrument, without incurring liability for its payment. Like an assignor, he gives no assurance that the parties primarily liable will or can pay the instrument. He is in fact merely assigning the credit and is not a party secondarily liable. His liability is like that of a seller. Thus, although the qualified indorser do not engage to pay the instrument upon its dishonor, by virtue of his indorsement, he makes certain implied warranties pertaining to the instrument those enumerated in Sec 65. Should there be a breach of any of these warranties, he will be held absolutely liable for any loss suffered by the holder. The same rule holds true with respect to one who negotiates bearer paper by mere delivery. Note however that in this latter case, liability extends in favor only of his immediate transferee, unless in the case of a qualified indorser, who

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warranties are made. Under Sec 65, the warranties of one who negotiates by delivery extends in favor of no holder other than the immediate transferee. Under this section the liability of the qualified indorser, by implication, runs to all subsequent holders whether holders in due course or not. However, the warranty cannot be enforced by one who at the time of the transfer had knowledge of the facts which constitutes the breach of warranty for in such case the transferee should be deemed to have taken the instrument with the defects he knew to be present. In Sec 66 however, the warranties of an unqualified indorser run to all subsequent holders in due course. The implication being that they do not run in favor of holders not in due course. It has been suggested that this phrase be interpreted to mean merely that the indorsee should not have had knowledge of the breach of warranty at the time the instrument is indorsed to him. It should not be required that such indorsee fulfill all the requisites of due course holding otherwise results may sometimes be unjust. If an indorsee for value in good faith but after maturity took from a fraudulent payee, he cannot recover from the maker because of the defense of fraud would be available against him. Would it be fair to conclude that he should not recover from his indorser, the fraudulent payee, on the latters warranty that the instrument is valid and subsisting? To validly negotiate an instrument payable to bearer on its face, it need not be indorsed. There is nothing however to prevent the holder from so doing if he wishes. If he does, his liability will no longer be governed by Sec 65, but by Sec 66, but his liability runs only in favor of those holders who make title through his indorsement, if this is special. He may be relieved from liability however, if the holder chooses to exercise his right to strike out the indorsement, which is actually not necessary to his (holders) title. Thus, where an instrument payable to bearer on its face is indorsed at the back in the following manner Pay to A (sgd.) B and A subsequently negotiates it by mere delivery to C, B is liable as general indorser to A only and not to C, because only A takes title through his indorsement. C takes title through the delivery to him of the instrument by A. If A however, negotiates the instrument as follows: Pay C (sgd.) A then B is liable as general indorser to both A and C because both take title through his indorsement

Sec. 67. LIABILITY OF INDORSER WHERE PAPER NEGOTIABLE BY DELIVERY. Where a person places his indorsement on an instrument negotiable by delivery he incurs all liabilities of an indorser. Sec. 63. WHEN PERSON DEEMED INDORSER. A person placing his signature upon an instrument otherwise than as maker, drawer, or acceptor is deemed to be an indorser, unless he clearly indicates by appropriate words his intention to be bound in some other capacity 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 The general indorser makes two contracts: an assignment or sale of the instrument, and a special contract of indorsement. Unlike the qualified indorser, he is liable not only as a vendor or assignor of a credit, but also on his contract of indorsement. As a vendor his liability is similar to that of the qualified indorser and the transferor by delivery. His liability on the special contract of indorsement is similar to that of the drawer and is expressed in the second paragraph of Sec 66 he engages that the instrument upon presentment, will be paid or accepted, or both, and if dishonored he engages to pay the holder, if proper proceedings on dishonor are duly taken. In this lies the fundamental difference between a qualified and a general indorser. The latter is a party secondarily liable. An action on the indorsers special contract of indorsement is conditioned on presentment, and notice of dishonor; his liability for breach of warranty is not so conditioned. Furthermore, the action on the special contract cannot be brought until maturity of the instrument while the action for breach of warranty, occurring as it does at the time of the transfer, may be brought at any time The implied warranties of a qualified indorser and a transferor by delivery, on the one hand, and an unqualified indorser on the other, as vendors of credits, are similar. Sec 66 incorporates paragraphs (a), (b) and (c) of Sec 65. But here, the similarly ends, for while under Sec 65 (d), the warranty as to the validity and the value of the instrument depends on knowledge, Sec 66 (b) imposes liability on the general indorser, if the instrument is not valid and subsisting at the time of his indorsement, whether or not he was ignorant of the cause thereof. A possible difference between the liability under Sec 65 and Sec 66 involves the parties in whose favor the

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If by the restrictive indorsement, the indorsee is made an agent of the indorser, although the instrument may be further negotiated, any indorsee subsequent to the restrictive indorsee acquires only the rights of the latter. In this case, since the restrictive indorsee is merely an agent of the restrictive indorser, such restrictive indorsee and all subsequent indorsees cannot acquire rights antagonistic to the restrictive indorser. And the latter cannot be liable to them either under Sec 65 or 66 A restrictive indorsement for the benefit of a third party makes the indorser liable as a general indorser unless he otherwise indicates. His liability extends to the restrictive indorsee and to all subsequent parties. One who assigns thus: For identification of payee only, (sgd.) A, is not an indorser and is not therefore liable even as a restrictive indorser. In signing the instrument, he does not assume the liabilities of a indorser since it is clear that he signs merely to identify the payee f. order of liability among indorsers

if the indorsement by B were in blank, and As were special, B would be liable to both A and C because his was not a special indorsement. If the indorsement of both A and B were in blank, then B would be liable to both A and C, since under Sec 67 he incurs all the liabilities of an indorser, in this case, the liabilities of a general indorser under Sec 66. To whom would B be liable if after his special indorsement to A the latter should indorse it in blank to C? When a maker issues a note payable to his own order, it is not complete until he indorses it. His indorsement thereof however does not make him liable as a sellerwarrantor and any defense which he may have as a maker is not lost to him because of his indorsement. The special contract of the indorser to pay in case of dishonor after due presentment and notice, is not present because it is absorbed in his liability as maker. In other words, the makers indorsement is not an indorsement in its legal sense, but is merely a step which completes the issuance of the instrument so that the first transferee may become a holder of the instrument and who in effect is the payee thereof. Despite the indorsement of the maker therefore, he is liable not as an indorser but as a maker. It is the practice of many drawee banks to require the holder of a check who is presenting it for payment to sign at the back of such check. Such signature is not an indorsement but merely an acknowledgement of the receipt from the drawee bank of the cash represented by the check. The holder therefore does not assume the liabilities of an indorser by signing under such circumstances Where a collecting bank with whom a check with a forged indorsement has been deposited, forwards it for clearing with all prior and/ or lack of indorsement guaranteed, its liability as a result of the forged indorsement arises not from Sec 66 but from such express warranty. Its act of forwarding the check for clearing is not an indorsement within the meaning of the NIL, but is a presentment to the drawee bank for payment e. liability of restrictive indorser

Sec. 68. ORDER IN WHICH INDORSERS ARE LIABLE. As respects one another, indorsers are liable prima facie in the order in which they indorse; but evidence is admissible to show that as between or among themselves they have agreed otherwise. Joint payees or joint indorsees who indorse are deemed to indorse jointly and severally Among themselves, indorsers are liable prima facie in the order they indorse. To illustrate: An instrument is payable to the order of Andoy. It bears the following indorsements on its back: Andoy, Paolo, Inna, Paeng, Juno, Nikki. The present holder is Pia. Pia, in case of dishonor, may go against any of the indorsers. If she decides to go against Paeng and Paeng pays her, Paeng may go against Andoy, Paolo, or Inna, but not against Juno or Nikki because they indorsed subsequent to him. In the same illustration, if Lori signs before Andoy to accommodate the latter, Paeng after paying Pia, may go against Lori although the latter is only an accommodation indorser. But if instead of Paeng it is Andoy who pays the holder Pia, Andoy should have no right of recourse against the prior indorser Lori because Andoy by asking Lori to accommodate him, has agreed not to hold Lori responsible to him Sec 68 does not bind the holder, and he may sue any of the indorsers, regardless of the order of their indorsement

The liability of a restrictive indorser would depend on what kind of restrictive indorsement he made. If it prohibits the further negotiation of the instrument, the instrument ceases to be negotiable. Nevertheless, the restrictive indorser is liable to his immediate indorsee as an unqualified indorser, unless he otherwise indicates. However, any subsequent transferee cannot acquire the rights of a holder because the instrument has become non-negotiable, and his rights, if any, will be merely that of an ordinary assignee.

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good friend to Andoy, Inna signs the note. She may sign it alone or both Andoy and Inna may sign as co-makers under a joint and several obligation. Inna here is an accommodation maker and when the instrument becomes due, Paolo can hold Inna directly liable for P1,000. Normally, Andoy should pay the instrument to Paolo at maturity, or supply Inna with the money to pay Paolo. In any case, Inna will have to pay Paolo regardless of whether Andoy supplies her the funds or not. After paying Paolo, Inna can then recover from Andoy the amount she paid to Paolo An accommodation party may sign as an indorser, in which case his liability will be merely secondary. To illustrate: Andoy is the payee of a note signed by Paolo to cover the purchase price of certain goods sold by Andoy to Paolo. The note is payable 90 days after date. Before maturity, Andoy is in need of cash. He tries to discount or sell the note but finds out that no one trusts his or Paolos credit. Andoy knows that Inna has a good credit standing in the community and so asks Inna to indorse the note. Being a good friend of Andoy, Inna indorses the same. Andoy thereafter succeeds in discounting or selling the note by indorsing it to Paeng, who is willing to pay for it because he trusts the solvency of Inna. At maturity date, Inna is liable to Paeng should the maker Paolo fails to pay. Paeng need not bother to charge Andoy, his immediate indorser, since he may choose to go against Inna. However, should Paeng choose to charge Andoy instead of Inna, Andoy, after paying Paeng, cannot in turn go against Inna although Inna is a prior indorser. The accommodation indorser is liable to all subsequent parties excepting always the party to whom he accommodated. Sec 29 makes the accommodation party liable to a holder for value even if such holder knew him to be only an accommodation party. Does this mean that the accommodation party is liable to a holder even if he is not a holder in due course, provided value was given by such holder? Although some courts have so construed the provision, the weight of authority is to the effect that the accommodation party is liable only to a holder in due course. The Supreme Court has followed the latter view, and has disallowed recovery from an accommodation maker or drawee in favor of the payee who, although a holder for value, did not have the other requisites of due course holding. This view is in consonance with the principle that in the hands of a holder other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were non-negotiable. However, the mere fact that the holder knew of the accommodation does not prevent him from being a holder in due course to recover from the accommodation party.

liability of accommodation parties

Sec. 29. LIABILITY OF ACCOMMODATION PARTY. An accommodation party is one who has signed the instrument as maker, drawer, acceptor or indorser, without receiving value therefore, and for the purpose of lending his name to some other person. 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 be only an accommodation party Sec. 63. WHEN PERSON DEEMED INDORSER. A person placing his signature upon an instrument, otherwise than as maker, drawer, or acceptor is deemed to be an indorser, unless he clearly indicates by appropriate words his intention to be bound in some other capacity Sec. 64. LIABILITY OF IRREGULAR INDORSER. Where a person, not otherwise a party to an instrument, places thereon his signature in blank before delivery, he is liable as indorser, in accordance with the following rules: 1. if the instrument is payable to order of a third person, he is liable to the payee and to all subsequent parties 2. 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 3. if he signs for the accommodation of the payee, he is liable to all parties subsequent to the payee An accommodation party, in lending his name to the accommodated party, is in effect a surety for the latter. He lends his name to enable the accommodated party to obtain credit or to raise money. He receives no part of the consideration for the instrument but assumes liability to the other parties thereto because he wants to accommodate another. Since the relationship between the accommodation and accommodated parties is one of principal and surety, should the accommodation party pay to the holder, he has a right to claim reimbursement from the party accommodated. Whether the accommodation partys liability is primary or secondary will depend on whether he signs as a maker, acceptor, drawer or indorser. If he signs as an indorser, he will be entitled to a notice of dishonor, and in its absence, he cannot be held liable. Should he sign as drawee-acceptor of a draft, he is primarily and personally liable thereon To illustrate: Andoy is in need of P1,000 and wants to borrow from Paolo. Paolo does not trust Andoys credit but is willing to lend Andoy provided Andoy can get an acceptable person to sign a promissory note for P1,000 payable to Paolo. Inna is acceptable to Paolo and being a

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Pay to A or order Sgd B (accommodated M) Pay to C Sgd A

A corporation, unless expressly authorized by its charter, has no power to sign as accommodation party, and cannot be held liable even to a holder for value. Only the officers who acted without authority will be personally responsible for such ultra vires act. Where a party accommodates the payee by signing alone as a maker of a note, the note suffers from absence of consideration. N such a case should the payee indorse it to Y after maturity, Y cannot hold the accommodation maker liable because the defense of absence of consideration will be available against Y, who is not a holder in due course. Where however, the accommodation party signs as a co-maker with the accommodated party, there is consideration for the note that which the accommodated party receives from the payee creditor. Should the instrument be indorsed to Y after maturity, Y although not a holder in due course can recover from the accommodation maker because there is no existing defense of lack of consideration. There was consideration, only that the accommodation co-maker received no part of it. The consideration that supports the accommodated partys promise supports also that of the accommodation party Without receiving value therefore does not mean that a person ceases to be an accommodation party merely because he receives some consideration for lending his name or credit to the accommodating party. The word therefore is so placed in the first sentence of Sec 29 that it can refer only to the instrument itself. Thus, an accommodation party loses his status as such only when he receives value not for lending his name, but for the instrument itself. An irregular or anomalous indorser is one who indorses the instrument in an unusual, singular and peculiar manner. His name appears where one would naturally expect another name. For example, an instrument is made payable to the order of A as the payee. As name should appear on the back of the instrument as the first indorser, but instead we find the name of B. B here is an irregular or anomalous indorser. In most cases, he is an accommodation indorser and is liable to the person indicated in Sec 64, but is never liable to the party accommodated. To illustrate Sec 64: 1. let us suppose that the payee A does not have faith in the financial ability of the maker or drawer of an instrument and is willing to take it only if B backs it up. The maker or drawer obtain Bs signature, after which A takes the paper and negotiates it to C. Bs name appears first on the back of the instrument, followed by As indorsement. In this case, B is liable to A, the payee, and to all subsequent parties

Sgd M 2.

suppose that the instrument is payable to the order of the maker or drawer, M, or to bearer, and M cannot circulate the instrument without Bs indorsement. B, if he signs, is not liable to M but only to parties subsequent to M. so that even if the first indorsement is Bs and the second Ms, B is not liable to the latter, but only to parties subsequent to M Sgd B (accommodated M) Pay to C Sgd M

Pay to the order M or Pay to bearer Sgd M 3.

likewise, if B signs to accommodate the payee, he is not liable to the payee although his signature may appear before the payees. his liability extends only to parties subsequent to the payee Sgd B (accommodated A) Pay to C Sgd A

Pay to A or order

Sgd M

An accommodation indorser, whether irregular or otherwise, is liable as a general indorser under Sec 66 unless he indicates otherwise. See case: Clark v. Sellner 42 Phil 384 (1921) See case: Maulini v. Serrano 28 Phil 640 (1914) See case: PNB v. Maza 48 Phil 207 (1925) See case: Acuna v. Veloso 50 Phil 241 (1927) See case: Ang Tiong v. Ting, et al. L-26767, Feb 22, 1968; 22 SCRA 713 See case: Sadaya v. Sevilla L-17845, April 27, 1967; 19 SCRA 924 See case: Prudencio v. CA L-34339 July 1, 1986; 143 SCRA 7 8. liability of an agent

Sec. 19. SIGNATURE BY AGENT; AUTHORITY; HOW SHOWN. The signature of any party may be made by a duly authorized agent. No particular form of appointment is necessary for this purpose; and the authority of the agent may be established as in other cases of agency

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who might be his principal, parole evidence is not admissible to avoid the agents personal liability. For example, where the signature Pedro Rodriguez, Treasurer appears without disclosure anywhere on the instrument of the name of the firm which might be the principal, such firm of which he is treasurer cannot be held liable thereon and Pedro Rodriguez is personally liable to the holder because the mere addition of words describing him as an agent, or as filling a representative character, without disclosing his principal, does not exempt him from personal liability. He cannot present evidence to show that he acted by authority of his firm. As in cases falling under number 1, this is without prejudice to any remedy which Pedro Rodriguez may have against the firm which had authorized him to act 3. where the agent signs his name without indicating that he acted as agent but somewhere on the instrument he has disclosed the name of a third person who might be his principal, the agent is presumptively liable but parole evidence is admissible to show that he was signing as agent of such third person where the agent has disclosed on the instrument the fact that he was acting in a representative capacity and has disclosed somewhere on the instrument the name of a third party who might be his principal, parole evidence is admissible to exonerate the agent from personal liability

Sec. 20. LIABILITY OF PERSON SIGNING AS AGENT AND SO FORTH. Where the instrument contains or a person adds to his signature words indicating that he signs for or on behalf of a principal, or in a representative capacity, he is not liable on the instrument if he was duly authorized; but the mere addition of words describing him as an agent, or as filling a representative character, without disclosing his principal, does not exempt him from personal liability Sec. 21. SIGNATURE BY PROCURATION; EFFECT OF. A signature by procuration operates as notice that the agent has but a limited authority to sign, and the principal is bound only in case the agent in so signing acted within the actual limits of his authority Sec. 69. LIABILITY OF AN AGENT OR BROKER. Where a broker or other agent negotiates an instrument without indorsement, he incurs all the liabilities prescribed by Section 65 of this Act, unless he discloses the name of his principal and the fact that he is acting only as agent The principal whose name is undisclosed on the instrument cannot be held liable thereon because under Sec 18, no person is liable on an instrument unless his signature appears thereon. In such case, the signing agent will be personally liable either as a maker, acceptor, drawer or indorser, as the case may be. Where an agent negotiates an instrument without indorsing it, and he does not disclose his principal nor that he is merely an agent, he is liable like one who negotiates by delivery under Sec 65 and not as a general indorser under Sec 66 There are four types of situations wherein the question of the agents personal liability is presented: 1. where the agent signs his name but nowhere on the instrument has he disclosed the fact that he was acting in a representative capacity nor the name of any third party for whom he might have acted as agent, no action will lie against the alleged principal. The agent is personally liable to the holder of the instrument and cannot be allowed to prove that he was merely acting as agent of another. Thus, where a person signed a note without disclosing that he did so as mere representative of his principal, he was held personally liable thereon though in fact he might have been authorized to act for them. This is of course without prejudice to any remedy which the agent may have against his principal who gave him authority to act. where the agent signs his name and indicates that he is acting in a representative capacity, but does not disclose the name of any third party

4.

Where the one signing not only discloses the name of a third party but also expressly indicates that a principalagent relationship exists between them, employing proper language to show that he is merely acting in a representative capacity, then the principal is bound and agent cannot be held personally liable to the holder, unless he had no authority from his principal to act as he did. To illustrate: Manila Publishing Co. By Pedro Rodriguez, Treasurer Or Pedro Rodriguez, Treasurer For and in behalf of Manila Publishing Co, In both cases, the principal is bound if the agent had authority to sign for it. If no such authority exists, and the principal is not guilty of estoppel, then no liability attaches to the latter since this would have the same effects as forgery under Sec 23. In such a case, the agent will be personally liable

2.

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Sec. 144. WHEN FAILURE TO PRESENT RELEASES DRAWER AND INDORSER. Except as herein otherwise provided, the holder of a bill which is required by the next preceding section to be presented for acceptance must either present it for acceptance or negotiate it within a reasonable time. If he fails to do so, the drawer and all indorsers are discharged Sec. 193. REASONABLE TIME, WHAT CONSTITUTES. In determining what is a reasonable time or an unreasonable time, regard is to be had the nature of the instrument, the usage of trade or business (if any) with respect to such instruments, and the facts of each particular case Presentment for acceptance refers to bills of exchange only. It means the production or exhibition of the bill of exchange to the drawee for the purpose of obtaining his acceptance of his assent to the order of the drawer. There are cases where presentment for acceptance is essential, some cases where it is not essential, and still other cases where it has no effect. Sec 143 enumerates the cases where it is necessary. For example, a bill payable 30 days after sight has to be presented for acceptance in order to fix its maturity date. Bills duly presented for acceptance under this section and not accepted will be deemed bills dishonored by nonacceptance. Although the law sets no definite time, it provides that such presentment must be made or it should be negotiated within a reasonable time, otherwise the drawers and indorsers will be discharged for they have an interest in having the bills accepted immediately in order to shorten the time of payment and thus put a limit to the period of their liability. This also enables them to protect themselves by other means if the bill is not accepted and paid within the time originally contemplated by them. Time bill or bills which are payable at a day certain or at a fixed time after its date and which do not fall under Sec 143(b) or (c) need not be presented for acceptance, but may be so presented if the holder wishes. In such case, if the drawee refuses to accept, the bill will be deemed dishonored by non-acceptance. Checks are not meant to be presented for acceptance or certification and if so presented and certification refused, they will not be deemed dishonored. The same rule applies to bills payable on demand

If an agent signs by procuration, it serves as a notice that the agents authority is limited, and therefore a person who takes the bill so signed is bound at his peril to inquire into the nature and extent of the agents authority. The principal would not be liable upon the instrument, even to a holder in due course, if the agent in so signing by procuration has exceeded the actual limits of his authority According to the majority rule, the words per proc or procuration must appear on the note for this section to be applicable. This method of signing is not in current use. The signature is in the following form: A per proc. B, or A, p.p. B See case: Insular Drug Co., Inc. v. PNB, et al. 58 Phil 684 (1933) See case: Philippine Bank of Commerce v. Aruego 102 SCRA 530 9. signature by trade name

Sec. 18. LIABILITY OF PERSON SIGNING IN TRADE OR ASSUMED NAME. No person is liable on the instrument whose signature does not appear thereon, except as herein otherwise provided. But one who signs in a trade or assumed name will be liable to the same extent as if he had signed in his own name. A person whose name does not appear upon the instrument may be held liable thereon if he, or his duly authorized agent, has signed thereto a trade name under which such person engages in business. This case does not constitute an exception to the rule which forbids an action on a negotiable instrument against one whose name does not appear thereon, but rather it is an instance in which the defendants business name serves the same purpose that would be served by the use of his given name and surname 10. presentment for acceptance a. when necessary; effect of nonpresentment
Sec. 143. WHEN PRESENTMENT FOR ACCEPTANCE MUST BE MADE. Presentment for acceptance must be made: 1. where the bill is payable after sight, or in any other case where presentment for acceptance is necessary in order to fix the maturity of the instrument; or 2. where the bill expressly stipulates that it shall be presented for acceptance; or 3. where the bill is drawn payable elsewhere than at the residence or place of business of the drawee In no other case is presentment for acceptance necessary in order to render any party to the bill liable

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c. when excused

Sec. 145. PRESENTMENT HOW MADE. Presentment for acceptance may be made by or on behalf of the holder at a reasonable hour on a business day, and before the bill is overdue, to the drawee or some person authorized to accept or refuse acceptance on his behalf; and 1. where a bill is addressed to two or more drawees who are not partners, presentment must be made to them all, unless one has authority to accept or refuse acceptance for all, in which case presentment may be made to him only; 2. where the drawee is dead, presentment may be made to his personal representative; 3. where the drawee has been adjudged a bankrupt or an insolvent, or has made an assignment for the benefit of creditors, presentment may be made to him or to his trustee or assignee. Sec. 146. ON WHAT DAYS PRESENTMENT MAY BE MADE. A bill may be presented for acceptance on any day on which negotiable instruments may be presented for payment under the provisions of Sections 72 and 85 of this Act. When Saturday is not otherwise a holiday, presentment for acceptance may be made before 12 n.n. on that day Presentment for acceptance should be made by the proper person to the proper party at the time and in the manner provided by law, otherwise it would be irregular and ineffective and the drawees refusal will not be a dishonor of the bill. It must be made at a reasonable hour on a business day or before noon on a Saturday but not on a Sunday or a holiday. Unlike the presentment for payment, the law does not prescribe the place where presentment for acceptance should be made. It would seem therefore that as long as such presentment is made to the proper person or persons in accordance with Sec 145, it would not matter where it takes place. Where the drawee is dead, presentment for acceptance to his personal representative is merely permissive, since Sec 148 (a) excuses presentment. But since there is no section which excuses presentment when the drawee is insolvent, the word may in paragraph (c) of said section indicates merely a permission to adopt either one of the two alternative methods of presentment stated to the insolvent himself or to his trustee or assignee but not a permission to omit presentment altogether

Sec. 148. WHERE PRESENTMENT EXCUSED. Presentment for acceptance is excused and a bill may be treated as dishonored by non-acceptance in either of the following cases: 1. where the drawee is dead, or has absconded or is a fictitious person or a person not having capacity to contract a bill 2. where after the exercise of reasonable diligence, presentment cannot be made 3. where although presentment has been irregular, acceptance has been refused on some other ground Sec. 147. PRESENTMENT; WHERE TIME IS INSUFFICIENT. Where the holder of a bill drawn payable elsewhere than at the place of business or the residence of the drawee has no time with the exercise of reasonable diligence to present the bill for acceptance before presenting it for payment on the day that it falls due, the delay caused by presenting the bill for acceptance before presenting it for payment is excused and does not discharge the drawers and indorsers Section 147 excuses delay in making presentment and Sec 148 excuses non-presentment for acceptance. A delay of the mails is sufficient excuse for omission to immediately present a bill for acceptance, and a presentment immediately after its reception is in time to charge the indorsers When a bill is presented after business hours or on a holiday, and the drawee refuses to accept because the drawer has no funds with him, although the presentment may have been irregular, the bill may be treated as dishonored under Sec 148(c). d. dishonor and its effects Sec. 149. WHEN DISHONORED BY NONACCEPTANCE. A bill is dishonored by nonacceptance: 1. when it is duly presented for acceptance, and such an acceptance as is prescribed by this Act is refused or cannot be obtained; or 2. when presentment for acceptance is excused and the bill is not accepted Sec. 150. DUTY OF HOLDER WHERE BILL NOT ACCEPTED. Where a bill is duly presented for acceptance and is not accepted within the prescribed time, the person presenting it must treat the bill as dishonored by non-acceptance or he loses the right of recourse against the drawer and indorsers.

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equivalent to a tender of payment upon his part. But except as herein otherwise provided, presentment for payment is necessary in order to charge the drawer and indorsers Presentment for payment is the presentation of the instrument, whether a note or bill, to the person primarily liable for the purpose of demanding and obtaining payment thereof. Presentment for payment need not be made to charge the primary party. The maker and acceptor are obliged to pay the instrument although no demand has been made on them on its due date and they remain liable even when it is already overdue. And this is true even if the instrument is payable at a special place. However, in this latter case, the ability and willingness of the primary party to pay at such special place on the date of maturity constitutes a tender of payment the effect of which is to relieve him from the payment of costs in case of suit, and from the payment of any interest accruing after maturity, limiting his liability to the amount due at the date of maturity. Such valid tender of payment may however result in the discharge of secondary parties b. when presentment not necessary i. as to drawer Sec. 79. WHEN PRESENTMENT NOT REQUIRED TO CHARGE THE DRAWER. Presentment for payment is not required in order to charge the drawer where he has no right to expect or require that the drawee or acceptor will pay the instrument This section gives an instance where the drawer will not de discharged in spite of lack of presentment to the primary party. The absence of a right in the drawer to require and of the right to expect the drawee to acceptor to pay are not identical in meaning. A right to require payment means that there is a pre-existing contract between the drawer and drawee which makes it a duty on the part of the drawee or acceptor to pay. A drawer may have the right to expect that the drawee will pay when, although there is no contractual duty then owed by the drawee to the drawer to pay, a course of dealing between the drawer and drawee justifies the reasonable expectation on the part of the drawer that the drawee will pay. Thus, where the drawer has no funds with the drawee, or where his bank balance is less than the amount of his check, or if he stopped payment thereof, the drawer would have no right to require or expect payment and presentment is therefore not necessary to charge him. Similarly, where the drawer and drawee are the same person, presentment is not required because under Sec 130, the holder may treat such instrument as a note. The drawee-drawer thus becomes a maker, a primary party who is liable even without presentment

Sec. 151. RIGHTS OF HOLDER WHERE BILL NOT ACCEPTED. Where a bill is dishonored by nonacceptance, an immediate right of recourse against the drawers and indorsers accrues to the holder, and no presentment for payment is necessary Sec. 89. TO WHOM NOTICE OF DISHONOR MUST BE GIVEN. Except as otherwise provided, when a negotiable instrument has been dishonored by nonacceptance or non-payment, notice of dishonor must be given to the drawer and to each indorser, and any drawer or indorser to whom such notice is not given is discharged Sec 117. EFFECT OF OMISSION TO GIVE NOTICE ON NON-ACCEPTANCE. An omission to give notice of dishonor by non-acceptance does not prejudice the rights of a holder in due course subsequent to the omission A bill is dishonored if an acceptance as is prescribed by this Act is refused or cannot be obtained. Thus, the holder is entitled to an unqualified acceptance written on the bill itself although he may agree to a qualified acceptance and/ or to an acceptance on a separate instrument. However, should he take a qualified acceptance, the indorsers and drawer would be discharged from liability unless they have consented to such an acceptance. On the other hand, acceptance on a separate instrument makes the acceptor liable only to one who takes the bill for value on the faith of such acceptance. The acceptance should be given within 24 hours from presentment, otherwise it should be treated as dishonored and a notice of dishonor should be sent to the secondary parties. The holders failure to do so will discharge such parties but will not prejudice the rights of a subsequent holder in due course. This rule is in consonance with Sec 52(b) which allows the holder of a dishonored instrument to be a holder in due course if he had no knowledge of such previous dishonor. When a bill is dishonored by non-acceptance, there is no need to present the instrument again for payment, and the holder acquires an immediate right of recourse against the persons secondarily liable, provided of course he gives them the notice of dishonor as prescribed by Sec 89 11. presentment for payment a. when presentment necessary; effect of non-presentment Sec. 70. PRESENTMENT FOR PAYMENT; EFFECT ON PARTIES. Presentment for payment is not necessary in order to charge the person primarily liable on the instrument; but if the instrument is, by its terms, payable at a special place, and he is able and willing to pay it there at maturity, such ability and willingness are

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Sec. 111. WAIVER OF PROTEST. A waiver of protest, whether in the case of a foreign bill of exchange or other negotiable instrument, is deemed to be a waiver not only of a formal protest, but also of presentment and notice of dishonor The fact that the drawee bank was closed by the government dispenses with presentment. But insolvency of the party upon whom presentment should be made does not. Where the drawee of the bill is a fictitious person, then no presentment can possibly be made and no secondary party can insist on it as a condition to his liability. Furthermore, in such a case, the holder may treat the instrument as a bill or note and hold the drawer liable as a maker who as a primary party is not entitled to presentment The circumstances under which waiver of presentment may be implied are varied. It may be implied from any conduct or act of the drawer which misleads or prevents the holder from treating the bill as he otherwise would. Thus, if the drawer promises from time to time to pay the bill, or makes part payment knowing that the bill has not been presented to the drawee, presentment is deemed waived. Likewise, consent given by an indorser to the holder before maturity that the time of payment may be extended to the maker constitutes a waiver. A tender of a renewal note by an indorser implies a waiver of presentment of the original. However, the fact that the co-maker of a note has a valid defense does not dispense with presentment to him in order to charge the indorser. And waiver of presentment by the maker of a note does not operate as a waiver by the indorser. The cases are in conflict on the question whether a waiver of notice of dishonor includes a waiver of presentment. And the cases are also in conflict as to whether a waiver of presentment includes waiver of notice of dishonor. It is submitted; however, that waiver of notice does not carry with it a waiver of presentment and vice versa. These two acts are distinct and independent of each other and both are conditions precedent to the liability of secondary parties. Lack of one, even in the presence of the other, will discharge the drawer and indorsers. The intention of such parties to dispense with either or both, therefore, must be clearly shown, and to imply the waiver of one from the waiver of the other seems to run counter to the rule that presence of only one is not sufficient to give rise to the liability of secondary parties. It is true that waiver of protest carries with it waiver of both presentment and notice, but this is so because of the nature of protest which, as we shall see later, necessitates both presentment and notice. Fortunately, in most cases where waiver is present, both presentment and notice are expressly included. To bind the indorser or drawer, his waiver must be with knowledge of the facts which release him, so that if he

Where the drawee is insolvent at the time a check is issued, and the drawer knows of it, presentment and notice are not required to charge him because he would not have the right to expect payment. ii. as to indorser Sec. 80. WHEN PRESENTMENT NOT REQUIRED TO CHARGE THE INDORSER. Presentment for payment is not required in order to charge an indorser where the instrument is made or accepted for his accommodation and he has no reason to expect that the instrument will be paid if presented. This section refers only to an indorser. In the usual case, the indorser is entitled to presentment to the primary party because the latter is normally the principal debtor. In the situation covered by Sec 80, however, the principal debtor is the indorser and thus has no right to demand payment from the accommodation maker or acceptor. To excuse presentment, 2 conditions must concur: (1) the instrument was made or accepted for the indorsers accommodation, and (2) he has no reason to expect its payment. Thus, where the instrument was not made or accepted for his accommodation, knowledge on the part of the indorser that the primary party is insolvent at the date of maturity does not free the holder from his duty to present, though he would have no reason to expect its payment It is not necessary under this section that a loan for which a note was given should have been made for the sole accommodation of the indorser. It is enough if it was only partly for his benefit. Note that the law includes only an indorser for whose accommodation an instrument is made or accepted and does not refer to an indorser for whom the bill is drawn. In the latter case, the accommodated indorser cannot be charged by the holder unless presentment is made to the drawee. iii. as to all secondary parties Sec. 82. WHEN PRESENTMENT MAY BE DISPENSED WITH. Presentment for payment is dispensed with: 1. where after the exercise of reasonable diligence presentment as required by this Act cannot be made; 2. where the drawee is a fictitious person; 3. by waiver of presentment, express or implied. Sec. 151. RIGHTS OF HOLDER WHERE BILL NOT ACCEPTED. When a bill is dishonored by nonacceptance, an immediate right of recourse against the drawers and indorsers accrues to the holder, and no presentment for payment is necessary

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the presentment will be ineffective to charge the secondary parties. If it falls due on a Friday which happens to be a holiday, it becomes payable on a Saturday, in which case, presentment should also be made, not on a Saturday, but on the next succeeding business day. If the instrument is payable on demand however, the holder may present it on any business day and even on a Saturday, provided that in the latter case, he does so before 12 n.n. and provided also that it is not a holiday. If he makes presentment on Saturday afternoon, it is not sufficient to place the maker in default. In determining the proper date for presentment, the date from which the time is to run is excluded and the date of payment included. Hence, a note dated November 8, 1994 and payable 12 months after date, should be presented for payment on November 8, 1995 and not on November 9, 1995. Sec 86, in providing that a specified event may be used as a point of time from which the period is to run, means any kind of event which under Sec 4 will not destroy negotiability. Suits instituted on the day of maturity is premature, as the party upon whom presentment is made has the whole of that day within which to pay d. date of presentment of demand notes Sec. 71. PRESENTMENT WHERE INSTRUMENT IS NOT PAYABLE ON DEMAND; AND WHERE PAYABLE ON DEMAND. Where the instrument is not payable on demand, presentment must be made on the day it falls due. Where it is payable on demand, presentment must be made within a reasonable time after its issue, except that in case of a bill of exchange, presentment for payment will be sufficient if made within a reasonable time after the last negotiation thereof. Different rules apply to demand notes and to demand bills of exchange. As regards demand notes the time at which the reasonable time begins to run is the date of issue of the note and not the date on which the individual indorser signed, so that the liability of all indorsers of a demand note expires at the same time. As to what constitutes a reasonable time under Sec 193 has been discussed. It is mostly a question of fact. Where a note payable on demand is issued in evidence of a crop loan, and the contract of loan specifies that the funds will be used for expenses of planting, harvesting and milling for that agricultural year, the repayment, cannot be demanded until the end of such agricultural year. Although the common law distinction between interest bearing demand notes and non-interest bearing demand

pays in ignorance of the fact that demand was not made and notice not given, he can recover back the money so paid. However, ignorance as to their legal effect will not relieve him from liability in the absence of fraud c. date and time of presentment of instrument bearing fixed maturity

Sec. 71. PRESENTMENT WHERE INSTRUMENT IS NOT PAYABLE ON DEMAND; AND WHERE PAYABLE ON DEMAND. Where the instrument is not payable on demand, presentment must be made on the day it falls due Sec. 85. TIME OF MATURITY. Every negotiable instrument is payable at the time fixed therein without grace. When the day of maturity falls upon Sunday, or a holiday, the instrument is payable on the next succeeding business day. Instruments falling due or becoming payable on Saturday are to be presented for payment on the next succeeding business day, except that instrument payable on demand may, at the option of the holder, be presented for payment before 12 n.n. on Saturday when that entire day is not a holiday Sec. 86. TIME; HOW COMPUTED. Where the instrument is payable at a fixed period after sate, after sight, or after happening of a specified event, the time of payment is determined by excluding the day from which the time is to begin to run, and by including the date of payment Sec. 194. TIME, HOW COMPUTED; WHEN LAST DAY FALLS ON A HOLIDAY. Where the day, or the last day, for doing any act herein required or permitted to be done falls on Sunday or on holiday, the act may be done on the next succeeding regular or business day If an instrument has a fixed date of maturity, presentment must be made on the day the instrument falls due. If made before maturity it is not effective. Thus, a notice to the makers before maturity, reminding them of the date when the note would fall due, is not a proper presentment. If made after maturity, it is too late and unless delay is excused by law, the secondary parties will be discharged. Presentment for payment cannot be made on a Sunday or legal holiday, and if the note matures on such a day, since the maker cannot be compelled to pay sooner than he promised, the note or bill will have to be presented on the next business day. This provision is mandatory and the holder cannot elect between making presentment on a Saturday before the due date or making it on the next succeeding business day. If an instrument falls due on a Saturday, and it is a time instrument, it should be presented on Monday or the next succeeding business day, if Monday is a holiday. If presented on a Saturday,

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the subsequent insolvency of the drawee bank at a time when the drawer had sufficient funds on deposit to pay the check. This rule is in harmony with Article 1249 of the Civil Code under which payment by way of check or other negotiable instrument is conditioned on its being cashed, except where through the fault of the creditor, the instrument is impaired. The payee of a check would be a creditor under this provision and if its non-payment is caused by his negligence, payment will be deemed effected and the obligation for which the check was given as conditional payment will be discharged. Sec 186 speaks only of the drawer but does not mention the indorser. In case of unreasonable delay in presentment of a check, would an indorser be fully discharged or would he be discharged only to the extent of any loss suffered by him? Our Supreme Court has held that the indorser of a check would be fully discharge, regardless of any loss suffered by him. Not being covered by Sec 186, he would be governed by the general provisions on bills of exchange under which indorsers are fully discharged by an unreasonable delay in presentment. But as to such indorsers, what date should be considered in determining the reasonableness of the time the date of issue or the date of last negotiation? Since indorsers of checks are to be governed by the same provisions applicable to bills of exchange payable on demand, reasonable time as to them should be reckoned from the last negotiation, and not from the date of issue. The rule found in Sec 186 does not dispense with presentment, so that if no presentment is made at all, the drawer cannot be held liable irrespective of loss or injury, unless of course presentment is otherwise excused. Therefore, an action by a holder before any presentment is made would be properly dismissed. What constitutes reasonable time is determined by Sec 193. It is well settled that when the drawer, drawee and payee all reside or are located in the same city, presentment of a check should be made on the business day next succeeding that on which it was issued. This does not mean however that the check ceases to be negotiable or that it can no longer be cashed after the end of the next business day. It merely means that in order that the holder may charge the drawer, presentment to the drawee bank should be made within a reasonable time after its issue or the drawer, if he suffers any loss, will be discharged to the extent thereof. Despite the lapse of reasonable time, the check remains effective as an order of the drawer to the drawee bank to pay the holder and if the bank does pay, it can debit the amount against the drawers account. Banks will however usually refuse to honor a check which has remained outstanding for more than six months. After such period, a check is considered stale, and the bank would usually

notes has been abolished by the NIL, the fact that a demand note bears interest is a fact which may be taken into consideration, as one of the circumstances of the case, in determining what constitutes a reasonable time. A note indorsed after maturity is, as to the person so indorsing, payable on demand and must be presented within a reasonable time to charge him. e. date of presentment of demand bills or exchange

While a demand note must be presented for payment within a reasonable time after issue, a demand bill of exchange should be presented within a reasonable time after the last negotiation thereof. The time within a check should be presented for payment is governed by Sec 186 Under Sec 71, the liability of the drawer and indorsers of a demand bill can be preserved indefinitely, provided presentment is made within a reasonable time from the last negotiation. However, under Sec 53, where an instrument payable on demand is negotiated an unreasonable length of time after its issue, the holder is not a holder in due course. Thus, although reasonable time may not have elapsed between the last negotiation and the presentment for payment of a demand bill, and the secondary parties thus remain liable, the holder who takes the instrument after the lapse of a reasonable time from its issue, will be subject to personal defenses f. date of presentment of checks

Sec. 185. CHECK DEFINED. A check is a bill of exchange drawn on a bank payable on demand. Except as herein otherwise provided, the provisions of this Act applicable to a bill of exchange payable on demand apply to a check Sec. 186. WITHIN WHAT TIME A CHECK MUST BE PRESENTED. A check must be presented for payment within a reasonable time after its issue or the drawer will be discharged from liability thereon to the extent of the loss caused by the delay A check is intended for immediate use. Hence, a special rule with respect to presentment for payment applies to checks, i.e., presentment must be made within a reasonable time after its issue. Unlike in ordinary bills of exchange, a transfer of a check to successive holders, where it is drawn and delivered in the place where the drawee bank is located, does not extend the time of presentment. However, the drawer is discharged by delay in presentment only to the extent of any loss caused by such delay. If no such loss is shown by the drawer, he remains liable despite the unreasonable delay. The most frequent cause of loss to the drawer which could have been prevented by a prompt presentment is

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However, when the maker has expressly waived demand, presentment, protest and notice of protest and non-payment of the note, the requirement of exhibition is rendered unnecessary A demand made by the holder upon the payor by telephone is not sufficient to charge an indorser, because payment is inoperative. Personal demand for payment by the holder who, at the time of demand, did not have the instrument with him, is not due presentment. But where such personal demand made by the holder who is not in possession of the instrument is refused on some other grounds, there is a waiver of the payors right to an exhibition of the note. When the instrument is lost or destroyed, the holder is excused from exhibiting the instrument, but he may recover on it only if he executes a sufficient bond i. what constitutes presentment sufficient

require the holder to get a new check from the drawer or pay it only after consulting the latter. The rule that a check should be presented not later than the next business day after its issue is not inflexible and the circumstances of the case and the usage of the place may warrant a longer period of time As previously noted, a check with the word memorandum written across its face need not be presented to charge the drawer thereof. See case: PNB v. Seeto 91 Phil 756 (1952) See case: Crystal v. CA 71 SCRA 443 (June 18, 1976) g. when delay in presentment excused

Sec. 81. WHEN DELAY IN MAKING PRESENTMENT IS EXCUSED. Delay in making presentment for payment is excused when the delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct, or negligence. When the cause of delay ceases to operate, presentment must be made with reasonable diligence. Inevitable or unavoidable causes not attributable to the fault of the holder and making presentment morally or physically impossible may excuse delay in presentment. Examples of these causes are strong typhoons, malignant disease, war, suspension of commercial relations by public enemy and impracticability of finding the maker at his place of residence The duty to make presentment is revived upon the removal of the cause which prevented the making of presentment at the time it normally should have been made. h. manner of presentment Sec. 74. INSTRUMENT MUST BE EXHIBITED. The instrument must be exhibited to the person from whom payment is demanded and when it is paid must be delivered up to the party paying it The instrument must be exhibited to the party from whom payment is demanded, otherwise presentment would be ineffective. This condition exists for the benefit of both primary and secondary parties. The requirement of exhibition is inseparable from the requirement of surrender of the instrument to the payor. He is entitled to see the instrument at the time of demand for payment in order to be certain that the one demanding is the holder, and to have the instrument surrendered to him to guard against a lawsuit by subsequent holder.

Sec. 72. WHAT CONSTITUTES SUFFICIENT PRESENTMENT. Presentment for payment, to be sufficient, must be made: 1. by the holder, or by some person authorized to receive payment on his behalf; 2. at a reasonable hour on a business day; 3. at a proper place as herein defined; 4. to the person primarily liable on the instrument, or if he is absent or inaccessible, to any person found at the place where the presentment is made i. by whom Presentment to be sufficient to charge secondary parties must be made by the holder himself or by a person authorized by him to receive payment. The holder may be one who is an owner of the instrument in his own right or a non-owner, as a restrictive indorsee for the benefit of a third person. A party in wrongful possession such as a possessor of an instrument with a forged indorsement would not be a holder and would therefore not be a proper party to make presentment. A person in rightful possession, although not a holder, but with authority from the latter may make due presentment. Crossed checks A check may be so issued that presentment can be made only by a bank. If two parallel lines are drawn across its face or across a corner thereof, it is said to be crossed check. If the name of a bank appears between the parallel lines, the check is said to be generally crossed, and payment should be made only upon presentment by some bank. Presentment by anyone else would not be proper, any payment by the drawee bank to such other

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regulations issued thereunder. Such Act prescribes a minimum limit of 6 hours a day, but a bank may, upon prior notice to the Monetary Board, be open for longer hours for the purpose of serving deposits and withdrawals. Many times, the banking hours of a bank coincide with its office hours. Where a note payable at a bank is presented before or after banking hours, such presentment is ineffective if payment is refused by the bank. But where the maker has no funds with the bank to meet the instrument at any time on the date of maturity, then even if presentment is made after banking hours but during office hours of the same day, it will be sufficient to charge the secondary parties. The person to make payment has until the close of banking hours in which to pay it, and a demand earlier in the day is premature. A promissory note payable at a bank and there presented on the day of maturity will be presumed to have been presented during business hours, where there is no evidence to the contrary, and it need not remain at the bank during all the day of maturity and the fact that the note was in the bank 3 days before maturity will raise the presumption that it was properly presented for maturity i. place of presentment Sec. 73. PLACE OF PRESENTMENT FOR PAYMENT. Presentment for payment is made at the proper place: 1. where a place of payment is specified in the instrument and it is there presented; 2. where no place of payment is specified, but the address of the person to make payment is given in the instrument and it is there presented; 3. where no place of payment is specified and no address is given and the instrument is presented at the usual place of business or residence of the person to make payment; 4. in any other case if presented to the person to make payment wherever he can be found, or if presented at his last known place of business or residence A presentment made upon the proper party at a place not authorized by Sec 73 is not due presentment because it does not come under Sec 72(c), as proper place as herein defined. Thus, when a note is payable at a specified place, which was the domicile and place of business of the maker, is not sufficient to charge the indorsers When an instrument is payable at a bank, its presence in the bank awaiting payment on the day of maturity until after banking hours is a sufficient presentment. But where a note is payable at a designated branch of a trust company, presentment at its principal office is not sufficient

person would be wrongful. This means that the payee or holder should deposit the crossed check in his bank so that the latter may make the proper presentment. The crossing of a check thus gives some measure of protection to the drawer and to the drawee bank. The negotiability of a check is not affected by its being crossed, whether specially or generally. It may legally be negotiated from one person to another as long as the one who encashes the check with the drawee bank is another bank, or if it is specially crossed, by the bank mentioned between the parallel lines Where the words For Payees Account Only are written between the parallel lines, the bank in which it is deposited cannot credit it to anyone elses account but the payees. Should it do so, it can be held liable to the payee should the latter suffer loss due to the banks wrongful act. See case: Chan Wan v. Tan Kim, et al. 50 OG 1554 (1960) See case: Associated Bank and Conrado Cruz v. CA and Merle Reyes, doing business under the name and style Melissas RTW 208 SCRA 465 ii. time of presentment Sec. 72. . . Presentment for payment, to be sufficient, must be made b. at a reasonable hour on a business day;

Sec 75. PRESENTMENT WHERE INSTRUMENT PAYABLE AT A BANK. Where the instrument is payable at a bank, presentment for payment must be made during banking hours, unless the person to make payment has no funds there to meet it any time during the day, in which case presentment at any hour before the bank is closed on that day is sufficient A reasonable hour on a business day means the usual office hours if presentment is made at the drawees or makers place of business, and the usual hours before rest if presentment is made at the place of his residence. Thus, presentment at the makers office at 8 p.m. would be ineffective to charge the drawer and indorsers. If the instrument is payable at a bank, presentment should be made during banking hours. These are the hours when the bank is open for transaction of business with the public in general. After the close of banking hours, work which does not involve direct dealings with the public continues until the end of the usual office hours. Banking hours depend on local usages and on the policy of the particular bank concerned, subject to the provisions of the General Banking Act and the

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connected therewith is sufficient and no personal demand on the maker is necessary If the primary party is dead, reasonable diligence should be exercised in order to make presentment to his representative unless the instrument specifies a place of payment, in which case, presentment must be made at such place and will be sufficient if made to any person found therein j. what constitutes dishonor by nonpayment

A place of payment may be a street address of any particular person. An address under Sec 73 may consist of a designation of a building by number, street and city, or by the name of the city alone Where no place of payment is specified but the usual place of residence or business is stated, presentment would not be sufficient even if made upon a proper party at a place other than the latter. Where there is no usual place of business or residence, the holder has three options. He may present the instrument to the proper party (1) wherever he may be found, or (2) his last known place of business, or (3) at his last known residence iv. to whom presentment must be made Sec. 72(d). To the person primarily liable on the instrument, or if he is absent or inaccessible, to any person found at the place where the presentment is made Sec. 76. PRESENTMENT WHERE PRINCIPAL DEBTOR IS DEAD. Where the person primarily liable on the instrument is dead, and no place of payment is specified, presentment for payment must be made to his personal representative, if such there be, and if with the exercise of reasonable diligence he can be found Sec. 77. PRESENTMENT TO PERSONS LIABLE AS PARTNERS. Where the persons primarily liable on the instrument are liable as partners, and no place of payment is specified, presentment for payment may be made to any one of them, even though there has been a dissolution of the firm Sec. 78. PRESENTMENT TO JOINT DEBTORS. Where there are several persons, not partners, primarily liable on the instrument and no place of payment is specified, presentment must be made to them all Since presentment must be made to the primary party, presentment for payment in case of a promissory note must be made upon the maker; and in case of an accepted bill, upon the acceptor. In the case of a bill of exchange or check payable on demand, usually there will be no acceptor, but presentment for payment will have to be made to the drawee, although he is not liable on the bill. This is in view of Sections 70, 61 and 66, which require presentment to the drawee as a condition precedent to the right of recourse of the holder against the drawer and indorsers. If the primary party is absent or inaccessible, it is sufficient to present the instrument to any person of sufficient discretion at the proper place of presentment. Thus, where a note is payable at a certain store, presentment for payment at such store to a person

Sec. 83. WHEN INSTRUMENT DISHONORED BY NON-PAYMENT. The instrument is dishonored by non-payment when: 1. if it is duly presented for payment and payment refused or cannot be obtained; or 2. presentment is excused and the instrument is overdue and unpaid An instrument is dishonored when not paid on presentment, irrespective of how non-payment results. Thus, a promise to pay five days after presentment constitutes dishonor of the instrument k. effect of dishonor by non-payment Sec. 84. LIABILITY OF PERSON SECONDARY LIABLE, WHEN INSTRUMENT DISHONORED. Subject to the provisions of this Act, when the instrument is dishonored by non-payment, an immediate right of recourse to all parties secondarily liable thereon accrues to the holder Dishonor is one of the facts which operate as a condition precedent to the enforcement of the liability of secondary parties. The immediate right of recourse against secondary parties is further conditioned upon the giving of due notice of dishonor. Note that the law says: Subject to the provisions of this Act. An indorser whose liability has become fixed by demand and notice is, as to the holder, a principal debtor under this section 12. notice of dishonor a. when necessary Sec. 89. TO WHOM NOTICE OF DISHONOR MUST BE GIVEN. Except as herein otherwise provided, when a negotiable instrument has been dishonored by non-acceptance or non-payment, notice of dishonor must be given to the drawer and to each indorser, and any drawer or indorser to whom such notice is not given is discharged

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Sec. 96. FORM OF NOTICE. The notice may be in writing or merely oral, and may be given in any terms which sufficiently identify the instrument, and indicate that it has been dishonored by non-acceptance or nonpayment. It may in all cases be given by delivering it personally or through the mails Notice may be given orally or in writing. Notice must (1) identify the instrument and (2) make known the fact that it has been dishonored either by nonacceptance or non-payment. A mere recital in the notice that the instrument was not paid would not be sufficient to constitute a statement that it has been dishonored. To constitute compliance with the rule, it must be accompanied by language which will inform the party addressed that the instrument had been duly presented. General language will be sufficient to meet the requirement Failure to state in the notice of dishonor the date of the making and maturity of a note, and the name of the payee does not invalidate the notice. No misdescription of the amount, or of the date, or of the name of the parties, or of the time the paper falls due, or other defect will vitiate the notice of dishonor, unless it misleads the party to whom it is sent. Where personal service is relied upon, the evidence must show either actual or personal service or an ordinary intelligent, diligent effort to make personal service upon the indorser either at his place of business during business hours, or at his residence if he has no place of business; but if he be absent, it is not necessary to call a second time, and the notice may, in that event, be left with anyone found in charge, or if there be no one in charge, or no one there, then the giving of notice is deemed to be waived. c. time within which notice must be given

Notice of dishonor is bringing either verbally or in writing, to the knowledge of the drawer or the indorser of the instrument, the fact that a specified negotiable instrument, upon proper proceedings taken, has not been accepted, or has not been paid, and that the party notified is expected to pay it. Thus, the purpose is to notify the drawer and/ or indorsers that the holder is enforcing his right against them under their contract to pay should the instrument not be paid or accepted at maturity. Without this notice, no secondary party may be held liable, except in the cases where the law provides otherwise To charge the indorser the complaint must allege and prove presentment to the maker and notice of dishonor, or that the same are dispensed with under Sec 82 and 109, respectively, or is not required under Sec 118. And the burden of proving due notice or that notice was waived or excused is on the holder. The indorsers knowledge that the maker was in default on a note does not dispense with notice of dishonor, and failure to notify the indorser discharges his obligation Where the primary is dead, although presentment is excused because no administrator has been appointed, if the instrument is overdue and unpaid and therefore dishonored under Sec 83, notice of dishonor must be given to the indorsers in compliance with Sec 89 Accommodation indorsers are entitled to notice of dishonor. But a joint maker is not an indorser and is primarily liable, and therefore is not entitled to notice of dishonor. In the absence of an acceleration clause, failure to notify an indorser of an installment note of the non-payment of previous installments does not affect his liability for later installments of the non-payment of which he has been duly notified, because in such case, each installment is considered a separate note. If there is an acceleration clause and such is optional on the holder, he has reasonable time for the exercise of the option, and the bringing of an action against the maker and indorsers constitutes a valid exercise of the option and at the same time a notice of dishonor. But if the acceleration clause is automatic, notice of dishonor must be given at once and it is not sufficient to give it upon commencement of the action See case: Gullas v. PNB 62 Phil 519 (1935) b. form and contents of notice Sec. 95. WHEN NOTICE SUFFICIENT. A written notice need not be signed and an insufficient written notice may be supplemented and validated by verbal communication. A misdescription of the instrument does not vitiate the notice unless the party to whom the notice is given is in fact misled thereby.

Sec. 102. TIME WITHIN WHICH NOTICE MUST BE GIVEN. Notice may be given as soon as the instrument is dishonored and unless delay is excused as hereinafter provided, must be given within the times fixed by this Act. Sec. 103. WHERE PARTIES RESIDE IN SAME PLACE. Where the person giving and the person to receive notice reside in the same place, notice must be given within the following times: 1. 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; 2. if given at his residence, it must be given before the usual hours of rest on the day following; 3. if sent by mail, it must be deposited in the post-

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In one case, the plaintiff holder of a demand note, presented it to the maker on the 17th of the month and was told to return on the 22nd and he would be paid. The plaintiff complied with the request, but on the 22nd the maker had absconded. On that day, notice was given the defendant. It was held that the notice was inoperative because dishonor took place on the 17th. Where the time for giving or sending notice falls on a Sunday or a holiday, the act may be done on the next succeeding business day under Sec 194. However, should a notice to be given on a Sunday or a holiday, it is sufficient. What would be the effect of delay in giving notice of dishonor of a check on the liability of the drawer? Sec 89 is quite clear when it provides that a drawer in such a case is discharged. It makes no distinction between the drawer of a check and the drawer of an ordinary bill. Is this provision inconsistent with the principle laid down in Sec 186 that delay in presentment of a check will discharge the drawer only to the extent of the loss suffered by him due to the delay? It is perhaps because of this apparent inconsistency that some jurisdictions have amended their statutes to apply the rule in Sec 186 to both presentment and notice. Under the common law, the drawer of a check was discharged only to the extent of the loss caused by delay in both presentment, and notice. Although Sec 186 covers only delay in presentment, cannot the common law rule on the effects of delay in notice to the drawer of a check come under Sec 196? Where the party to be notified has a place of business in one place and residence in another, the holder has the option to send the notice to either place, but having exercised his option, the time within which notice must be given or sent is fixed by the location of the place to which he chooses to send the notice. The term convenient in Sec 104(a) means convenient to the sender. If the first mail leaves at 1 a.m. for example, the holder is not required to send it by that mail. On the other hand, it has been held that when the departure time for the mail the day after dishonor is between 9 and 11 a.m., it is convenient. The question as to what is convenient hour depends on the usual hours of opening of business houses and the post office, and also upon the time required for the postman to pick up mail in the various parts of the city and to get it to the central office. Where it is proven that the notice was duly addressed and deposited in the post office, the holder is deemed conclusively to have given notice. The presumption is therefore conclusive that the party to whom the notice is given received it. However, although non-receipt of a duly mailed notice does not discharge an indorser,

office in time to reach him in the usual course on the day following. Sec. 104. WHERE PARTIES RESIDE IN DIFFERENT PLACES. Where the person giving and the person to receive notice reside in different places, the notice must be given within the following times: 1. if sent by mail, it must be deposited in the post office in time to go by mail the day following the day of dishonor, or if there be no mail at a convenient hour on that day, by the next mail thereafter. 2. 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 the post office within the time specified in the last subdivision Sec. 105. WHEN SENDER DEEMED TO HAVE GIVEN DUE NOTICE. Where notice of dishonor is duly addressed and deposited in the post office, the sender is deemed to have given due notice, notwithstanding any miscarriage in the mails Sec. 106. DEPOSIT IN POST OFFICE; WHAT CONSTITUTES. Notice is deemed to have been deposited in the post office when deposited in any branch post office or in any letter box under the control of the post office department Sec. 107. NOTICE TO SUBSEQUENT PARTY; TIME OF. Where a party receives notice of dishonor, he has, after the receipt of such notice, the same time for giving notice to antecedent parties that the holder has after the dishonor Sec. 113. DELAY IN GIVING NOTICE OF DISHONOR; HOW EXCUSED. Delay in giving notice is excused when the delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct or negligence. When the cause of delay ceases to operate, notice must be given with reasonable diligence. It should be remembered that the foregoing provisions apply to all cases of dishonor, whether by non-payment or non-acceptance The earliest time at which a notice of dishonor may be sent is immediately after dishonor, and a notice of dishonor by non-payment before maturity of the instrument is premature and ineffective. The latest time at which a notice of dishonor may be given, depends in part on whether the party to give notice and the party to be notified are in the same place or in different places. At any rate, if a notice is not given within the time fixed by Sec 103 and 104, the notice is inoperative and the secondary party so notified is discharged.

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d. place where notice must be given Sec. 108. WHERE NOTICE MUST BE SENT. Where a party has added an address to his signature, notice of dishonor must be sent to that address; but if he has not given such address, then the notice must be sent as follows: 1. either to the post office nearest to his place of residence or to the post office where he is accustomed to receive his letters; or 2. if he lives in one place, and has his place of business in another, notice may be sent to either place; or 3. if he is sojourning in another place, notice may be sent to the place where he is sojourning. But where the notice is actually received by the party within the time specified in this Act, it will be sufficient though not sent in accordance with the requirements of this section The sending of a notice to an address designated by the indorser will be sufficient even though the address is an incorrect one. Where notice is sent to an address other than the one designated, the notice may be binding upon proof by the sender of its actual receipt. In this case, mailing will not give rise to the presumption of receipt, rebuttable or conclusive. The burden of proof of actual receipt of the notice will rest upon the party who gave it. e. by whom notice may be given

evidence of such non-receipt is admissible on the question whether the notice was actually mailed. Notice of dishonor is duly addressed under Sec 105 when a letter or post card has been written by the sender and properly stamped, containing the information required by Sec 96, and which notice bears the name of the party to whom notice is to be sent and the designation of the proper place. Thus, where the president of the corporation and the corporation were both indorsers, a mailed notice of non-payment addressed to the corporation, attention to the president, was held not to be duly address to the individual indorser so as to give rise to the presumption of due notice. Sec 106 defines the act of depositing in the post office. Under this section, depositing of a notice in a mail chute under the control of the post office is sufficient. But where the notice was left in a notarys office where mail was usually collected by the postman, it does not constitute deposit in the post office. In large business firms, many times the only evidence to prove depositing of the letter containing the notice in the post office, consists of a testimony regarding customary procedure which normally results in the deposit of the letter in the post office. In such cases, in view of the large outgoing daily mail, it would be almost impossible for the person in charge of mailing to remember and testify that he actually deposited the letter in the post office. Whether such proof is tantamount to proof of mailing in a post office has been the subject of conflict of opinions. Some courts adhere to the literal construction of the statute while others, recognizing the practical difficulties confronting a large business, have been more liberal in their interpretation and have held that proof of the customary procedure is equivalent to proof of mailing in a post office. In these cases, however, the presumption of receipt of notice established by Sec 105 is merely rebuttable and not conclusive. Under Sec 107, each party who receives notice is given the same period of time within which to notify prior indorsers that the last holder had to give notice to those indorsers notified by him. To illustrate: Andoy, Paolo, and Inna are indorsers, and Paeng is the holder. All of them reside in the same place. Paeng presents his instrument for payment to the maker on June 1, and the maker refuses to pay Paeng. Paeng must give notice to the indorsers not later than the next day, June 2. Assuming Paeng notifies only Inna in due time, Inna, if she wants to go against Andoy and Paolo must notify wither or both not later than June 3. If Inna notifies only Paolo, the latter, if he wants to exercise his right of recourse against Andoy, must notify Andoy not later than June 4.

Sec. 90. BY WHOM GIVEN. The notice may be given by or on behalf of the holder or by or on behalf of any party to the instrument who might be compelled to pay it to the holder, and who, upon taking it up, would have a right to reimbursement from the party to whom the notice is given Sec. 91. NOTICE GIVEN BY AGENT. Notice of dishonor may be given by an agent either in his own name or in the name of any party entitled to give notice, whether that party be his principal or not A holder, whether he is the owner of the instrument or not, may give notice of dishonor. Thus, a restrictive indorsee who is trustee for the benefit of another, or an indorsee for collection, can give a binding notice. It may also be given by one duly authorized by the holder to collect though he himself is not a holder. This group would include notaries and attorneys. A prior indorser may give notice to parties prior to him because he is a party who might be compelled to pay the instrument to the holder and upon so paying would have a right of reimbursement from the party notified. Thus, if the following indorsements appear on the back of an instrument:

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iii. if party is dead Sec. 98. NOTICE WHERE PARTY IS DEAD. When a party is dead, and his death is known to the party giving notice, the notice must be given to a personal 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 or last place of business of the deceased. If the partys death is known to the holder, he is put on inquiry to find out whether there is a personal representative or not. If he neglects to make inquiry and the personal representative could have been found with reasonable diligence, notice to the last residence or place of business of the deceased would be ineffective to charge the estate. On the other hand, if the fact of death is not known to the holder, although he could have discovered such fact with the exercise of reasonable diligence, Sec 98 does not impose on him the duty to notify the personal representative In such a case, notice sent in accordance with Sec 108 would be sufficient iv. to partners 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 Notice to one partner is notice to firm although it was fraudulently suppressed by the partner who received it. This section does not undertakings of a partner apply to the individual

D may notify any or all of the prior indorsers. C may notify A or B and B may notify A. C and B may give notice either before or after they have received notice from D. Notice given by the maker is not binding unless he has been authorized, either expressly or impliedly, to give such notice. Thus, the showing to the indorser by the maker of a telegram demanding payment of the maker is not sufficient notice. f. to whom notice must be given i. if given by agent

Sec. 94. WHEN AGENT MAY GIVE NOTICE. Where the instrument has been dishonored in the hands of an agent, he may either himself give notice to the parties liable thereon, or he may give notice to his principal. If he gives notice to his principal, he must do so within the same time as if he were the holder, and the principal upon the receipt of such notice has himself the same time for giving as if the agent had been an independent holder A typical example of an agent under the above section is the bank with whom a check has been deposited by the holder for collection. Assuming the check is dishonored by the drawee bank, the collecting bank should notify either the drawer directly or his principal (the holder) of such dishonor within the time specified by Sec 103 and 104. Should he decide to notify the holder, the latter has the same time to notify the secondary parties, as if the collecting bank were an independent holder. ii. to whom in general 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 Not every agent of the party sought to be charged would be a proper agent within this section, because it is clear therefore that an agent to be competent to receive notice of dishonor must be an agent in behalf. Leaving the notice at the window of the cashier of a hotel corporation is not sufficient notice, when it does not appear that any ones attention was drawn to the notice, or that any one was present. An oral notice by telephone to a clerk of an indorsing corporation is not notice to the corporation, especially when it does not appear that the clerk had communicated the notice to anyone connected with the management of the business of the corporation.

v. to joint parties Sec. 100. NOTICE TO PERSONS JOINTLY LIABLE. Notice to joint parties who are not partners must be given to each of them, unless one of them has authority to receive such notice for the others This section should be interpreted with Sec 68 under which joint payees or joint indorsees are deemed to indorse jointly and severally. Thus, a notice to only one of them is sufficient to charge the notified indorser and the failure to notify the others, although it will discharge the latter, will not discharge the former. But where the joint parties are not jointly and severally liable, such as joint drawers, Sec 100 applies and notice to each of them is necessary to charge any of them, unless the one notified was given authority to receive for the others. Thus, if only one of such joint parties is notified, all of them are discharged. Their liability under Sec 100 is conditioned upon notice to each of them.

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words should include also parties subsequent to the holder who gave notice. These provisions seek to avoid repetitious notices h. when rule requiring notice not applied i. in general Sec. 112. WHEN NOTICE IS DISPENSED WITH. Notice of dishonor is dispensed with when, after the exercise of reasonable diligence, it cannot be given to or does not reach the parties sought to be charged. The last clause of this section is a reiteration of the rule in Sec 105 Reasonable diligence depends upon the circumstances of the case. Thus, where the holder examined a telephone directory for the address of the defendant and, failing to find it, mailed the notice to a co-indorser whose address he knew, but failed to inquire of the co-indorser, it was held that reasonable diligence had not been exercised. Similarly, where notice is sent to a town where the indorser had never lived, and which was not received, it is ineffective. On the other hand, in a case where the holder inquired of the payee and mailed the notices to the address given by such payee, then later he learned of the indorsers address and mailed the second set of notices, it was held that reasonable diligence had been exercised. It will sometimes be difficult to draw a line between this section and Sec 113 which enumerates the circumstances excusing delay in giving notice but which requires notice to be given where the cause for delay ceases. ii. when notice of nonacceptance already given 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. The reason for this rule is that a dishonor by nonacceptance confers upon the holder an immediate right against all secondary parties. If the holder then gives due notice of dishonor, he may enforce his rights against them by an action. If he fails to give notice of dishonor by non-acceptance, his rights against secondary parties are lost and such rights will not be revived by a subsequent presentment for payment

Sec. 101. NOTICE TO BANKRUPT. Where a party has been adjudged a bankrupt or an insolvent, or has made an assignment for the benefit of creditors, notice may be given either to the party himself or to his trustee or assignee g. in whose favor notice operates

Sec. 92. EFFECT OF NOTICE ON BEHALF OF HOLDER. Where notice is given by or on behalf of the holder, it inures for the benefit of all subsequent holders and all prior parties who have a right of recourse against the party to whom it is given Sec. 93. EFFECT WHERE NOTICE IS GIVEN BY PARTY ENTITLED THERETO. Where notice is given by or on behalf of a party entitled to give notice, it inures for the benefit of the holder and all parties subsequent to the party to whom notice is given Illustration: the following are indorsers of a note in the order of their indorsement: A B C D E holder who gives notice and subsequently negotiates the note to F Suppose that E gave notice to B and C, such notice operates for the benefit of F, a subsequent holder. The notice of E to B operates also in favor of C who is a party prior to the holder E having a right of recourse against B even if C has not himself given B notice of dishonor under Sec 107 Suppose that upon receiving the notice of dishonor from E, C duly notifies A, such notice by C to A comes under Sec 93 and it operates in favor of B, a party subsequent to A, and in favor of E, the holder. So that if E cannot collect from either B or C, the parties to whom he sent notice, he can go against A even if he himself had not notified A. Thus, A is not discharged by failure of E to give him notice, if A is notified properly by a person entitled to give notice. D of course is discharged because E failed to notify him. But will the notice of C to A operate in favor of F, a party subsequent to the holder? Sec 93 says that it inures to the benefit of the holder and all subsequent to the party to whom notice was given. It is clear that it covers parties subsequent to the party notified and who are above the holder like B. But it is believed that such

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4. where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument; where the drawer has countermanded payment.

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 express or implied. Sec. 110. WHO AFFECTED BY WAIVER. Where the waiver is embodied in the instrument itself, it is binding upon all parties; but where it is written above the signature of an indorser, it binds him only. Waiver may be made before or after maturity of the instrument, and it may either be express or implied. A letter from the indorser to the holder after dishonor, admitting liability, is a waiver of lack of notice. Similarly, when a note is dishonored and no notice is given to indorsers, but the indorsers procure the holder to consent to an extension of time or payment and accept a renewal note, there is a waiver of notice on the original note. The burden of proof is on the holder to show waiver of notice, and it will not be inferred from doubtful acts or language of the indorser, but must be proved by clear and unequivocal evidence. As to who will be affected by an express waiver will depend on where the waiver is written. Where the words appear on the body or face of the instrument, it is embodied in the instrument within the meaning of Sec 110, and therefore binds all parties. However, the waiver may be so worded as to render it inapplicable to certain parties. For example, The drawer waives notice and presentment does not apply to an indorser even if it appears on the face of the instrument. Where the waiver is printed or written across the back of an instrument, and under such waiver appears the names of several indorsers, there is a conflict of opinion as to whether all of the latter are bound by the waiver or only the indorser whose signature first appears under the waiver. Of course, the waiver may be so worded that it clearly applies to only one or it may expressly cover all subsequent indorsers. iv. when not necessary charge drawer to

5.

The reason for not requiring notice under paragraphs (a) and (b) is that in each of these cases, the holder is given the option under Sec 130 of treating the instrument as a promissory note, thus considering the drawer a maker and a primary party. Examples of bills drawn on the drawer are cashiers checks, bills of exchange drawn by agents of the drawer upon their principal and travelers checks. The reason for non-requirement of notice under paragraph (c) is because such demand for payment, of itself, constitutes notice of dishonor of the bill. The case referred to must be one where presentment has been made upon the drawee who dishonors the bill, or a case where for some reason presentment is not required or is dispensed with, and the holder demands payment from the drawer within such time that he should give notice of dishonor to the drawer. Under paragraph (d) where there is no antecedent contractual relation between the drawer and drawee under which the drawee is bound to accept or pay, notice of dishonor is not required because the drawee has no right to require that the drawee accept or pay. Thus, where the drawer of a check has no account or no sufficient funds with the drawee bank, he is not entitled to notice of dishonor. However, the absence of contractual relation between the drawer and drawee will not always operate to free the holder from the duty to give notice to the drawer, who may have a reason to expect that despite such absence, the drawee may accept or pay. Such expectation may arise from a course dealing between the drawer and drawee or because of a business or other relationship between them. This is a rule similar to that found in Sec 79 Notice of dishonor is not required where the drawer has countermanded payment because it is his own act which causes the dishonor of the instrument. Countermanding payment is the same as a stop order and means ordering the drawee bank not to pay the check issued by the drawer See case: State Investment House, Inc. v. CA and Nora Moulic 217 SCRA 33 (Jan. 11, 1993)

Sec. 114. WHEN NOTICE NEED NOT BE GIVEN TO DRAWER. Notice of dishonor is not required to be given to the drawer in either of the following cases: 1. where the drawer and drawee are the same person; 2. where the drawee is a fictitious person or a person not having capacity to contract; 3. when the drawer is the person to whom the instrument is presented for payment;

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v. when not necessary charge indorser to A holder in due course cannot be prejudiced by the failure or neglect of a previous holder to give a notice of dishonor by non-acceptance. Thus, the drawer who was not notified by the previous holder of the drawees nonacceptance of a bill can be held liable at maturity by a subsequent holder in due course who did not know of the previous dishonor. But if the holder knew of such dishonor, he cannot be held in due course because under Sec 54(b) one of the requirements of due course holding is that the holder took the indorsement without notice that it had been previously dishonored if such was the fact. In such a case, therefore, he cannot hold liable previous parties who were not notified of the dishonor. A dishonor by non-payment necessarily presupposes that the instrument has matured, and therefore, no holder subsequent thereto can be a holder in due course. Such dishonor by non-payment will thus prejudice all subsequent holders 13. protest a. definition and method Protest is the testimony of some proper person, usually a notary and usually in the form of an affidavit, that the regular legal steps to fix the liability of drawer and indorsers have been taken. Its method is for the notary himself to properly present the instrument, and demand its acceptance or payment. If these are refused, he makes a minute thereof on the instrument or on his official record; the minute consisting of his initials, the year, the month, the day of dishonor, and his charges. This is done on the day of dishonor. And on the same day, or afterwards, the notary extends the protest thus noted by embodying in a certificate the facts of the protest, and his acts in making presentment, demand and in giving notice of dishonor. To this he appends his official seal b. when necessary Sec. 152. IN WHAT CASES PROTEST NECESSARY. Where a foreign bill appearing on its face to be such is dishonored by non-acceptance, it must be duly protested for non-acceptance, and where such a bill which has not previously been dishonored by non-acceptance, is dishonored by non-payment, it must be duly protested for non-payment. If it is not so protested, the drawer and indorsers are discharged. Where a bill does not appear on its face to be a foreign bill, protest thereof in case of dishonor is unnecessary Sec. 129. INLAND AND FOREIGN BILLS OF EXCHANGE. An inland bill of exchange is a bill which is or on its face purports to be, both drawn and payable within the Philippines. Any other bill is a foreign bill. Unless the contrary appears on the face of the bill, the holder may treat it as an inland bill

Sec. 115. WHEN NOTICE NEED NOT BE GIVEN TO INDORSER. Notice of dishonor is not required to be given to an indorser in either of the following cases: 1. where the drawee is a fictitious person or a person not having capacity to contract, and the indorser was aware of the fact at the time he indorsed the instrument; 2. where the indorser is the person to whom the instrument is presented for payment; 3. where the instrument was made or accepted for his accommodation Paragraph (a) is similar to paragraph (b) of Sec 114, with the exception that the indorser must have knowledge of the fact therein stated. Paragraph (b) must be interpreted in the same way as paragraph (c) of Sec 114 i.e., the presentment to the indorser must be after dishonor by the maker, drawee or acceptor, and within the time that the holder is entitled to give notice to such indorser. The reason behind paragraph (c) is that the indorser is in fact the principal debtor Under this section, it has been held that the insolvency of the maker will not excuse notice to the indorser, even if the indorser knew of such fact. The intention of the holder to make him liable must be expressed by a notice of dishonor i. legal effect of failure to give notice

Sec. 89. TO WHOM NOTICE OF DISHONOR MUST BE GIVEN. Except as herein otherwise provided, when a negotiable instrument has been dishonored by non-acceptance or non-payment, notice of dishonor must be given to the drawer and to each indorser and any drawer or indorser to whom such notice is not given is discharged Sec. 117. EFFECT OF OMISSION TO GIVE NOTICE OF NON-ACCEPTANCE. An omission to give notice of dishonor by non-acceptance does not prejudice the rights of a holder in due course subsequent to the omission Under Sec 66, the indorser engaged to pay only if the instrument is dishonored and the necessary proceedings on dishonor are duly taken. Necessary proceedings on dishonor means notice of dishonor and in case of foreign bills of exchange, an additional requirement of protest. Hence, his liability is conditional, among other things, on notice of dishonor and if such notice is not given, he is discharged.

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indorsers. However, it is merely prima facie evidence and all facts stated therein may be disproved by competent evidence showing the statements to be false e. by whom made

Sec. 157. PROTEST BOTH FOR NON-ACCEPTANCE AND NON-PAYMENT. A bill which has been protested for non-acceptance may be subsequently protested for non-payment In addition to due presentment, dishonor and due notice of dishonor, formal protest of dishonored foreign bills is a condition precedent to the holders right of recovery from secondary parties. In the absence of such protest, the secondary party will be discharged. The necessity of protest is confined to foreign bills of exchange which under Sec 185 include foreign checks. It is not necessary if foreign promissory notes because in the case of a note, the maker is unconditionally liable, while in an unaccepted bill no party is liable unless there has been due notice of dishonor. A bill to be considered foreign under Sec 152 must be one which on its face purports to be drawn in the Philippines and payable in another country, or drawn in another country and payable in the Philippines. Although the requirement of protest is confined to foreign bills, it may be made in case of other kinds of bills if the holder so wishes A bill which has already been protested for nonacceptance need not be protested again for non-payment, but Sec 157 allows such to be done, if the holder wants to c. forms and contents of certificate of protest

Sec. 154. PROTEST; BY WHOM MADE. Protest may be made by: 1. a notary public; or 2. by any respectable resident of the place where the bill is dishonored, in the presence of two or more credible witnesses In making a formal protest, the notary public acts in a different capacity from that in which he acts when making acknowledgment. In the latter case, the notary attests to the fact that the affiant made a statement under oath. He is not concerned with the truth or falsity of the statement. In making a protest, he is making a written statement of facts which are within his knowledge. He is stating that he himself presented the instrument for acceptance or payment. Since he is making such attestation, he must have presented the instrument in person, and presentment by his clerk will be ineffective to make the protest valid. Where the person making the protest is not a notary, it must be made in the presence of two witnesses f. time and place of protest

Sec. 153. PROTEST; HOW MADE. The protest must be annexed to the bill, or must contain a copy thereof, and must be under the hand and seal of the notary making it, and must specify: 1. the time and place of presentment; 2. the fact that presentment was made and the manner thereof; 3. the cause and reason for protesting the bill; 4. the demand made and the answer given, if any, or the fact that the drawee or acceptor could not be found In the above provision, protest means the certificate of the notary or other person attesting to the acts constituting protest d. purpose of the certificate of protest The certificate of protest is the same as a deposition. It is admissible as evidence of the facts set forth in its terms and its production does away with the necessity of proving these facts by witnesses in court. The main purpose therefore is to furnish to the holder legal testimony of presentment, demand and notice of dishonor, to be used in actions against the drawer and

Sec. 155. PROTEST; WHEN TO BE MADE. When a bill is protested, such protest must be made on the day of its dishonor, unless delay is excused as herein provided. When a bill has been duly noted, the protest may be subsequently extended as of the date of the noting Sec. 156. PROTEST; WHERE MADE. A bill must be protested at the place where it is dishonored, except that when a bill drawn payable at the place of business or residence of some person other than the drawee, has been dishonored by non-acceptance, it must be protested for non-payment at the place where it is expressed to be payable and no further presentment for payment to, or demand on, the drawee is necessary The protest must be made on the day of dishonor. In the 2nd sentence of Sec 155, protest is again used to mean certificate of protest. The notation is for the purpose of requiring the commitment of the facts to writing while they are fresh in the mind of the notary. He does not have to make the formal certificate of protest on the same day the instrument is protested by him, if he makes a notation on the bill to show that the instrument was dishonored and on that date. In such case, the formal certificate may be made at any time before bringing an action against the secondary parties, and its effect will retroact to the date of the noting. It should be

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j. protest in case of loss of instrument

remembered, however, that the notice of dishonor will have to be given within the prescribed time, otherwise the secondary parties will be discharged. g. protest for better security

Sec. 160. PROTEST WHERE BILL IS LOST, ETC. When a bill is lost or destroyed or is wrongly detained from the person entitled to hold it, protest may be made on a copy or written particulars thereof. This provision is in consonance with the general principle that the loss of an instrument does not affect the rights and liabilities of parties thereto, and the contents of the instrument may be proven as in other cases of lost documents 14. acceptance for honor Sec. 161. WHEN BILL MAY BE ACCEPTED FOR HONOR. Where a bill of exchange has been protested for dishonor by non-acceptance or protested for better security, and is not overdue, any person not being a party already liable thereon may, with the consent of the holder, intervene and accept the bill supra protest for the honor of the person for whose account the bill is drawn. The acceptance for honor may be for part only of the sum for which the bill is drawn; and where there has been an acceptance of honor for one party, there may be a further acceptance by a different person for the honor of another party Sec. 131. REFEREE IN CASE OF NEED. The drawer of a bill and any indorser may insert thereon the name of a person to whom the holder may resort in case of need; that is to say, in case the bill is dishonored by nonacceptance or non-payment. Such person is called the referee in case of need. It is in the option of the holder to resort to the referee in case of need or not, as he may see fit The practice of accepting for honor is practically obsolete. Thus only a brief consideration of the more salient points of the subject will be made. The student is referred to Sections 162-170 of the law for all the other provisions on the matter. Acceptance for honor is proper only after a bill has been protested for dishonor by non-acceptance or for better security. It is made to save the credit of some party or parties to an instrument. If the name of a referee in case of need is inserted in the bill, the holder may resort to him in case of dishonor, and his acceptance would be an acceptance for honor. As in other cases of acceptance it must be in writing and signed by the acceptor and, in addition, must indicate that it is an acceptance for honor. And where the acceptor does not state for whose honor he accepts, it will be deemed to have been for the honor of the drawer. The general effect of an acceptance for honor is to make the acceptor liable on the bill to the holder and all parties

Sec. 158. PROTEST BEFORE MATURITY WHERE ACCEPTOR INSOLVENT. Where the acceptor has been adjudged a bankrupt or an insolvent, or has made an assignment for the benefit of creditors, before the bill matures, the holder may cause the bill to be protested for better security against the drawer and indorsers This practice seems to be obsolete. Nothing in the section indicates that the failure to protest for better security would deprive the holder of any rights; neither does it indicate that the holder acquires any additional right. The purpose of the section must therefore be merely to inform the drawer of the failure of the acceptor to enable the former to arrange for the payment of the bill at maturity, as for example, for its acceptance for honor h. when delay is excused and protest is dispensed with Sec. 159. WHEN PROTEST DISPENSED WITH. Protest is dispensed with by any circumstances which would dispense with notice of dishonor. Delay in noting or protesting is excused when delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct or negligence. When the cause of delay ceases to operate, the bill must be noted or protested with reasonable diligence Sec. 112. WHEN NOTICE IS DISPENSED WITH. Notice of dishonor is dispensed with when, after the exercise of reasonable diligence, it cannot be given to or does not reach the parties sought to be charged. The excuses for delay in making protest and the circumstances which dispense with it are the same as those in notice of dishonor. It is also believed that Sec 159 incorporates not only Sec 122 but also, by implication, Sec 114 and 115 which set forth the circumstances when notice is not necessary to charge the drawer and indorser i. waiver of protest

Sec. 111. WAIVER OF PROTEST. A waiver of protest, whether in the case of a foreign bill of exchange or other negotiable instrument, is deemed to be a waiver not only of a formal protest, but also of presentment and notice of dishonor.

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16. liability of party on indorsement after maturity Sec. 7. WHEN PAYABLE ON DEMAND. When an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person issuing, accepting, or indorsing it, payable on demand. This provision is a codification of the so-called new bill doctrine at common law, under which the indorser, issuer or acceptor after maturity is considered to have drawn an entirely new bill. 17. instrument payable at a bank

subsequent to the party for whose honor he accepted. However, his liability is not absolute but merely conditioned on the drawees failure to pay upon presentment at maturity, after which a protest must be made and a notice of dishonor be given to the acceptor for honor. Another effect of an acceptance for honor is that the holders rights against secondary parties are postponed until the following conditions take place: (1) presentment for payment to the drawee, (2) dishonor by such drawee, (3) notice of dishonor to the acceptor for honor and secondary parties, (4) protest, (5) presentment to the acceptor for honor, (6) dishonor by him, (7) notice of dishonor to the secondary parties. The acceptor for honor, should he suffer damages due to his acceptance, has a right of recourse against the party for whose honor he accepted and all parties against whom the latter would have recourse 15. payment for honor Sec. 171. WHO MAY MAKE PAYMENT FOR HONOR. Where a bill has been protested for nonpayment, any person may intervene and pay it supra protest for the honor of any person liable thereon or for the honor of the person for whose account it was drawn. The student is referred to Sections 171 to 177 of the law as to the requisites and effects of a payment for honor. Under these provisions, only a bill which has been protested can be paid for honor and in order no to operate as a mere voluntary payment, it has to be made before a notary after a declaration by the payor of his intention to pay for honor and for whose honor he pays. A payment for honor is not confined to an acceptor for honor but may be made by anyone as long as the requisites are complied with. The effect of a payment for honor is to discharge all parties subsequent to the party for whose honor it was paid. Therefore, the holder who refuses such payment loses his right of recourse against any party who would have been discharged by such payment. The payor for honor is subrogated to all the rights and duties of the holder as regards the party for whose honor he pays and all parties liable to the latter. The purpose therefore of a payment for honor is to free some party to the bill from the obligation to make immediate payment on maturity. The holder gets satisfaction, but the party for whom payment is made is not discharged and remains liable to the payor for honor. Like acceptance for honor, payment of bills for honor has been rendered virtually obsolete by the development of international banking, the use of the letter of credit, and other financial arrangements in international trade.

Sec. 87. RULE WHERE INSTRUMENT PAYABLE AT BANK. Where the instrument is made payable at a bank it is equivalent to an order to the bank to pay the same for the account of the principal debtor thereon Although an instrument is payable at a bank is very similar to a check, the liability of the maker or an acceptor of such an instrument is primary. The effect of Sec 87 making such an instrument equivalent to an order to the bank to pay the same does not convert the maker or acceptor into a drawer. Therefore, presentment for payment would not be necessary to charge such maker or acceptor. As a consequence, the weight of authority is that Sec 186 which provides that a check should be presented for payment within a reasonable time after its issue or the drawer will be discharged to the extent of the loss caused by the delay, does not apply to instruments payable at a bank 18. bills in set Sec. 178.BILLS IN SET CONSTITUTE ONE BILL. Where a bill is drawn in a set, each part of the set being numbered and containing a reference to the other parts, the whole of the parts constitutes one bill Sec. 179. RIGHTS OF HOLDERS WHERE DIFFERENT PARTS ARE NEGOTIATED. Where two or more parts of a set are negotiated to different holders in due course, the holder whose title first accrues is as between such holders the true owner of the bill. But nothing in this section affects the rights of a person who in due course accepts or pays the part presented to him Sec. 180. LIABILITY OF HOLDER WHO INDORSES TWO OR MORE PARTS OF A SET TO DIFFERENT PERSONS. Where the holder of a set indorses two or more parts to different persons he is liable on every such parts, and every indorser subsequent to him is liable on the part he has himself indorsed, as if such parts were separate bills

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Exchange of $5,000 Manila, Philippines March 3, 1950 Thirty days after sight of this Third Exchange (First and Second Unpaid), Pay to Elizabeth Aragon or order the sum of Five Thousand US Dollars only. Value received. (sgd.) Dante Castro To: Fidel Tuazon 35 Cambridge Dr. Forbes Park, Makati

Sec. 181. ACCEPTANCE OF BILLS DRAWN IN SETS. The acceptance may be written on any part and it must be written on one part only. If the drawee accepts more than one part, and such accepted parts are negotiated to different holders in due course, he is liable on every such part as if it were a separate bill Sec. 182. PAYMENT BY ACCEPTOR OF BILLS DRAWN IN SETS. When the acceptor of a bill drawn in a set pays it without requiring the part bearing his acceptance to be delivered up to him, and that part at maturity is outstanding in the hands of a holder in due course, he is liable to the holder thereon. Sec. 183. EFFECT OF DISCHARGING ONE OF A SET. Except as herein otherwise provided, where any one part of a bill drawn in a set is discharged by payment or otherwise the whole bill is discharged. The practice of drawing bills in set grew sometime in the 16th century and was most common in cases where a bill had to be sent to a distant place. The reason for drawing bills in a set was to obviate the difficulties whish would arise in case of miscarriage of the bill, since the means of communication and transportation then were irregular and not very dependable. It was thought that if drawn in set and each part sent by different means, chances that one of the set would reach the payee or its destination would be greater. The use of such bills in sets must have diminished since because of the facility and regularity of our modern means of communication All of the parts of the set form only one bill. Following is an illustration of a bill in set:
Exchange of $5,000 Manila, Philippines March 3, 1950 Thirty days after sight of this First Exchange (Second and Third Unpaid), Pay to Elizabeth Aragon or order the sum of Five Thousand US Dollars only. Value received. (sgd.) Dante Castro To: Fidel Tuazon 35 Cambridge Dr. Forbes Park, Makati Exchange of $5,000 Manila, Philippines March 3, 1950 Thirty days after sight of this Second Exchange (First and Third Unpaid), Pay to Elizabeth Aragon or order the sum of Five Thousand US Dollars only. Value received. (sgd.) Dante Castro To: Fidel Tuazon 35 Cambridge Dr. Forbes Park, Makati

All rules applicable to bills of exchange generally are applicable to bills issued in sets. But there are special rules rendered necessary because of the nature of bills so issued. Problem arise at a point where a party transfers two or more parts to the same bill to different persons To illustrate: Andoy draws three bills on a set and sends each part by different means of transportation to Paolo, the payee. All parts of the bill reach Paolo safely. Paolo should negotiate only one part. If he negotiates each part to different persons, he is liable on each part. Suppose Paolo negotiates the first part to Inna on May 1, the second part to Paeng on May 2, and the third part to Juno on May 3, - as between Inna, Paeng and Juno, Inna is the true owner. Thus, supposing all three of them go simultaneously to the drawee, Lori, Lori should only accept or pay Innas part, otherwise the acceptance of payment will not be in due course since she knows that Innas title accrued earliest. But suppose Juno goes to Lori ahead of either Inna or Paeng and Lori does not know that the other parts have been negotiated by the payee Paolo, and Lori accepts or pays Juno, such acceptance or payment is valid and binding. Although Inna is the true owner, Lori did not know this fact and as far as Lori is concerned, she had the privilege to accept Junos part. Should Inna later on present her part to Lori, Lori may rightfully reject it. Should she accept it, then she will be liable on both Junos and Innas parts as if they were different bills. Upon paying one of the parts, the acceptor should require delivery of such part to her in order to prevent its further negotiation. Should she fail to do so, she will be liable to a holder in due course to whom it may be later negotiated. With the exceptions mentioned above, when any part of a bill in set is paid or otherwise discharged, the whole bill is discharged.

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Chapter 6: Discharge 1. discharge of the instrument

19. liability of transferors or assignors of negotiable instrument Art. 1628. The vendor in good faith shall be responsible for the existence and legality of the credit at the time of sale, unless it should have been sold as doubtful; but not for the solvency of the debtor, unless it has been so expressly stipulated or unless the insolvency was prior to the sale and of common knowledge Even in these cases he shall only be liable for the price received and for the expenses specified in No. 1 of Article 1616. The vendor in bad faith shall always be answerable for the payment of all expenses, and for damages (New Civil Code) A negotiable instrument should be transferred by negotiation in order that the transferor may acquire the rights granted by the NIL. However, a negotiable instrument may be transferred without negotiation, in which case the transferee is a mere vendee or assignee without being a holder. Even if he has all the requisites of due course holding under Sec 52, his right to recover against the party primarily liable is always subject to existing defenses available to such party. However, as against his transferor, he has all the rights of a vendee. Under our law on assignments, the vendor of the credit warrants the existence and legality of the credit at the same time of the sale, but not the solvency of the debtor. It will be noted that this is similar to the liability of qualified indorser and one negotiating by delivery. However, except to the extent of the genuineness of the instrument, the latter does not warrant its existence and legality but merely that they have no knowledge of any fact which would impair its validity. It seems therefore that the liability of a mere assignor of a negotiable instrument is broader than the liability of a qualified indorser and one who negotiated by delivery, and consequently the rights of subsequent holders as against the qualified indorser and negotiator by delivery are in a sense more limited than those of an assignee of a negotiable instrument under our law. However, a mere assignee of the negotiable instrument is not a holder until and unless he exercises his right to compel indorsement under Sec 49. Until then therefore, he cannot be a holder in due course, and is thus subject to all defenses. On the other hand, a holder subsequent to a qualified indorser or negotiator by delivery, has all the rights of a holder in due course provided he meets all the requisites of Sec 52 and would therefore be free from personal defenses. In this lies the main difference between an assignee and an indorsee

The discharge of a negotiable instrument effects the extinguishment of the obligations arising thereunder. It relieves all parties, whether primary or secondary, from further liability on the instrument Sec. 119. INSTRUMENT; HOW DISCHARGED. A negotiable instrument is discharged: 1. by payment in due course by or on behalf of the principal debtor; 2. by payment in due course by the party accommodated, where the instrument is made or accepted for accommodation; 3. by intentional cancellation thereof by the holder; 4. by any other act which will discharge a simple contract for the payment of money; 5. when the principal debtor becomes the holder of the instrument at or after maturity in his own right a. by payment in due course

Sec. 51. RIGHT OF HOLDER TO SUE; PAYMENT. The holder of a negotiable instrument may sue thereon in his own name; and payment to him in due course discharges the instrument Sec. 88. WHAT CONSTITUTES PAYMENT IN DUE COURSE. Payment is made in due course when it is made at or after the maturity of the instrument to the holder thereof in good faith and without notice that his title is defective i. medium of payment Payment is the most usual way of discharging a bill or note. Since a negotiable instrument must contain an unconditional promise or order to pay a sum certain in money, payment should be in money in order to effect its discharge. If the parties agree to discharge the instrument by a renewal note, it would be discharged not by payment strictly speaking, but by novation or by agreement, which modes are expressly recognized under Sec 119(d) ii. by whom made Payment must be made by or on behalf of the principal debtor, otherwise it would constitute a purchase or negotiation, and the instrument would remain outstanding. Principal debtor would include the maker and the acceptor. Although the drawee is not a party until he accepts and payment by him is literally not a discharge under Sec 119, he fulfills the representation

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either expressly, impliedly, or by estoppel, to receive payment in his behalf See case: Equitable Banking Co. v. IAC and the Edward Nell Co. 161 SCRA 518 (1988) v. at or after maturity Payment must be made to the holder at or after maturity in order to operate as a discharge of the instrument. If paid before maturity and the instrument is negotiated to a holder in due course, the latter may recover on the instrument vi. in good faith and without notice If the payor at the time he pays knows that the holders title is defective, payment by him even at or after maturity, will not be payment in due course under Sec 88 and therefore, will not operate as a discharge of the instrument. He can still be made liable thereon by the true owner of the instrument. However, if the payor did not know or did not have notice of the defective title, his payment will operate to discharge the instrument. Thus, if the instrument is payable to bearer and was stolen from the payee, the maker or acceptor who pays without knowledge of such loss, pays in due course. The original holder from whom it was stolen cannot subsequently claim payment against the maker or acceptor on the ground that he is the real owner of the instrument. As far as the maker or acceptor is concerned, the instrument was discharged upon his payment. The remedy of the original holder is against the thief. On the other hand, if the party demanding payment is a holder in due course and the defect n the instrument or in the title thereto does not give rise to a real defense, the maker or acceptor is liable to pay, and if he does pay, it is still payment in due course, although the latter may have known of the infirmity. Any party prejudiced by such payment will have a remedy against the guilty party The maker or acceptor must satisfy himself, when the instrument is presented to him for payment that the holder traces his title through genuine indorsements; if there is a forged indorsement, no right can pass through it, and payment by him will not effect a discharge of the instrument b. by intentional cancellation Sec. 119. INSTRUMENT; HOW DISCHARGED. A negotiable instrument is discharged: XXX

made by the drawer and by the indorsers and therefore payment by him will also discharge the instrument. Payment by the accommodated party if the instrument is made or accepted for his accommodation is actually payment by the principal debtor, whether or not he appears to be a party to the instrument. Payment by an indorser at maturity, not on behalf of the principal debtor but in discharge of his own liability, he does not discharge the instrument but constitutes the indorsee a holder of the instrument, which remains a continuing obligation against the primary party. Neither does payment by the drawer discharge the instrument Whether the principal debtor in Sec 119 means primary party has been much debated question. Although many cases hold that it does, it is believed that the better view is that the term principal debtor means exactly what is says. Thus, if the primary party is an accommodation party, like a guarantor or surety, since he is not the principal debtor, payment by him does not discharge the instrument. iii. when check deemed paid by drawee bank If the holder presents a check over the counter of the drawee bank, it is clear that the check is paid or discharged as soon as the holder receives the cash. But a holder may prefer to deposit the amount in his own account in the drawee bank. In such a case, in the absence of any other agreement between the parties, if the bank credits the amount of the check to the depositors account, it is equivalent to paying the money to the depositor, and receiving the cash again for deposit. The check will then be deemed discharged. Likewise, where the drawee bank charges the check to the account of the drawer, it shows its intention to honor the check and it will be deemed paid whether or not a credit entry has been made to the holder. However, entry of a credit by the clearing house does not constitute payment and the drawee bank still has the right to reject the check when it reaches it from the clearing house iv. to whom made Payment in order to discharge the instrument must be in due course. In order to be in due course, it must be made to the holder, whether he is the beneficial holder or merely a non-beneficial owner under a restrictive indorsement. Payment to one of several payees or indorsees in the alternative discharges the instrument but payment to one of several joint payees or joint indorsers, is not a discharge unless the party receiving payment had authority form the others to receive payment on their behalf. Payment to a prior holder will not discharge the instrument unless he is authorized by the present holder

3. by intentional cancellation thereof by the holder;

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annulment, rescission, fulfillment of a resolutory condition, and prescription, are governed elsewhere in the Code (New Civil Code) d. by reacquisition of principal debtor in his own right Sec. 119. INSTRUMENT; HOW DISCHARGED. A negotiable instrument is discharged: XXX 5. when the principal debtor becomes the holder of the instrument at or after maturity in his own right. Reacquisition must be at or after maturity, otherwise no discharge will be effected and the instrument may be further negotiated. This paragraph deals with reacquisition by the principal debtor of a kind which should result in discharge, but which is not discharged by payment or by renunciation governed by Sections 119(a) and 122, respectively. What circumstances would constitute a reacquisition of a principal debtor in his own right? If he reacquires it as an agent of another, he does not do so in his own right. Nor is it so if he reacquires it as a pledge from the holder. e. by renunciation of holder

Sec. 123. CANCELLATION; UNINTENTIONAL; BURDEN OF PROOF. A cancellation made unintentionally, or under a mistake, or without the authority of the holder, is inoperative; but where an instrument or any signature thereon appears to have been cancelled the burden of proof lies in the party who alleges that the cancellation was made unintentionally, or under a mistake, or without authority Where the holder of a note intentionally tears it up and throws it is the waste basket, there is a discharge of the note. Intentionally stamping the instrument paid is presumptive evidence of discharge, which however may be rebutted by contrary proof. Cancellation likewise includes obliteration, erasure or burning. If the cancellation is made without authority, or made unintentionally or by mistake or through fraud, it is inoperative. The burden of proving this however, is on the person claiming its effectiveness, because cancellation is presumed to be intentional. Cancellation need not be supported by consideration in order to operate as a discharge of the instrument. And it is effective even without notice to the primary party c. by any other act discharge a contract which will

An instrument is discharged by any act which will discharge a simple contract for the payment of money, like novation. Thus, the issuance of a renewal note will raise a presumption of a discharge of the old note if the latter is surrendered in exchange for the new one. However, where the old note is retained, the presumption is that the issuance of the new note will not discharge the old note. If the new note is issued merely as a security for the old note which is retained, then it is clear that there is no intention to discharge the old note An instrument may also be discharged by rendition of services, by transfer of property, by foreclosure of a mortgaged property where the proceeds thereof are at least equal to the amount of the instrument, and by acceptance of a part as full settlement of the note As to other acts of discharging contracts, the general law on obligations and contracts can apply whenever proper Art. 1231. Obligations are extinguished by: 1. payment or performance; 2. by the loss of the thing due; 3. by the condonation or remission of the debt; 4. by the confusion or merger of the rights of creditor and debtor; 5. by compensation; 6. by novation. Other causes of extinguishment of obligations, such as

Sec. 122. RENUNCIATION BY HOLDER. The holder may expressly renounce his rights against any party to the instrument before or after its maturity. An absolute and unconditional renunciation of his rights against the principal debtor made at or after the maturity of the instrument, discharges the instrument. But a renunciation does not affect the rights of a holder in due course without notice. A renunciation must be in writing, unless the instrument is delivered up to the person primarily liable thereon This section provides for 2 forms of renunciation: (1) written declaration to that effect; and (2) by surrender of the instrument to the primary party. If made at or after maturity in favor of the principal debtor, the instrument is discharged provided the renunciation is absolute and unconditional. If made in favor of any party, it will discharge only such party and parties subsequent to him, but not the instrument. In either case, a holder in due course is protected in case he takes without notice of renunciation As in intentional cancellation, renunciation need not be supported by a consideration Renunciation under this section should not be confused with intentional cancellation and discharge by accord and satisfaction or by novation, although they all produce similar effects. Renunciation will effect a discharge of

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the following: (1) payment in due course; (2) intentional cancellation of the instrument; (3) any act which will discharge a contract; (4) reacquisition by principal debtor; (5) renunciation by holder; (6) material alteration b. by intentional signature cancellation of

the instrument only if made at or after maturity. Novation requires consent of both parties. Renunciation, on the other hand, is a unilateral act of the holder. f. material alteration

Sec. 124. ALTERATION OF INSTRUMENT; EFFECT OF. Where negotiable instrument is materially altered without the assent of all parties liable thereon, it is avoided, except as against a party who has himself made, authorized or assented to the alteration and subsequent indorsers. But when an instrument has been materially altered and is in the hands of a holder in due course, not a party to the alteration, he may enforce payment thereof according to its original tenor. Sec. 125. WHAT CONSTITUTES A MATERIAL ALTERATION. Any alteration which changes: the date; the sum payable, either for principal or interest; the time or place of payment; the number of relations of the parties; the medium of currency in which payment is to be made; 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 As in cancellation, material alteration in order to operate as a discharge need not take place at or after maturity 2. discharge of secondary parties

Sec. 123. CANCELLATION; UNINTENTIONAL; BURDEN OF PROOF. A cancellation made unintentionally, or under a mistake or without the authority of the holder, is inoperative; but where the instrument or any signature thereon appears to have been cancelled the burden of proof lies on the party who alleges that the cancellation was made unintentionally, or under a mistake or without authority Sec. 48. STRIKING OUT INDORSEMENTS. The holder may at any time strike out any indorsement which is not necessary to his title. The indorser whose indorsement is struck out and all indorsers subsequent to him are thereby relieved from liability on the instrument c. by discharge of prior party

The reason for discharging parties subsequent to the party discharged is that the act of discharge removes from the former a possible source of reimbursement form the latter. The common law before the NIL applied only to discharge by act of the holder and not to discharge by operation of law. This rule has been interpreted by the courts as fully incorporated by Sec 120 (c). Thus, discharge by bankruptcy of a prior party, or by the running of the statute of limitations does not discharge other indorsers. But where an indorser upon presentation of the note to him for payment, writes after his indorsement the words without recourse and the holder by silence acquiesced thereto and takes back the note unpaid, the indorser is discharged by an act of assent of the holder, and all subsequent indorsers are discharged. d. by valid tender of payment by prior party Where an instrument is payable at a bank, the fact that the maker had money on deposit in the bank at maturity is not sufficient tender of payment to discharge an indorser, if no evidence of the fact was given to the holder. There must be evidence not only of ability, but also willingness to apply such deposit to the payment of the instrument.

Sec. 120. WHEN PERSONS SECONDARILY LIABLE ON, DISCHARGED. A person secondarily liable on the instrument is 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; 4. by a valid tender of payment made by a prior party; 5. by a release of a principal debtor, unless the holders right of recourse against the party secondarily liable is expressly reserved; 6. by any agreement binding upon the holder to extend the time of payment, or to postpone the holders 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 expressly reserved. a. by discharge of instrument

Sec. 120(a) in effect incorporates Sections 119, 122, 124, 125, and 88. Thus, discharge of secondary parties by discharge of the instrument may be effected by any of

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they will be discharged from all liability under the instrument. And this would be true whether or not the agreement to extend is binding on the holder because, in either case, there will be a failure to pay the instrument on its due date, entitling the secondary parties to notice of such dishonor by non-payment. However, where presentment and notice have been waived by an indorser, a binding extension given by the holder at or after maturity would discharge such indorser, unless he assents to the extension, or the holders right of recourse against him is expressly reserved. And if despite the waiver, notice of dishonor is given to him, this should be considered as an express reservation of the holders right of recourse against him The use of renewal notes to effect an extension is common. The issuance of such notes however does not always operate to discharge an indorser. If the old note is retained and the renewal note is taken merely as collateral security for the old note, the indorser is not discharged. If the old note is surrendered and the renewal note bears a suture date of payment, there is in effect an extension of time payment and the indorser will be discharged. The consent to an extension may be given either before or at the time of extension g. by renunciation

by release of principal debtor

Sec. 120(e) refers to a release of the debtor by the creditor and not by operation of law, like a judgment for the maker in an unsuccessful suit by the indorsee against him It has been held that reservations of the right of recourse cannot be implied from acts and conduct of the holder but should be express. A strictly literal interpretation of the law may result in inequity. Under such an interpretation knowledge or consent of the indorser is immaterial. Although the indorser consents to the release of the principal debtor, if the holder does not expressly reserve his right against such indorser, the latter will also be released. Obviously, the holder will seek the consent of the indorser to the release because he wants to retain his rights against the indorser, in spite of such release. But if after obtaining such consent, the holder fails to make an express reservation of his rights against the consenting indorser, the latter will be released, contrary to the holders intention and expectation. It is for this reason that some courts refuse to adhere to a literal interpretation of this subsection and hold that the consent to a release preserves the liability of the party giving it f. by extension of time of payment

Sec. 120. WHEN PERSONS SECONDARILY LIABLE ON, DISCHARGED. A person secondarily liable on the instrument is discharged: XXX 6. by any agreement binding upon the holder to extend the time of payment, or to postpone the holders 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 expressly reserved. The agreement referred to is one between the holder and the principal debtor. This is in harmony with the rule that an extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty. The drawer and indorsers are indeed guarantors of the maker and acceptor. The law provides that the agreement to extend the time of payment must be binding on the holder in order to operate as a discharge of the secondary parties. Thus, if it is not supported by a consideration, secondary parties remain liable. This requirement more properly applies to an extension given before the due date of the instrument. If the extension is given at or after maturity, there is a dishonor of the instrument, and unless notice is given to the secondary parties within the time prescribed by law,

Sec. 122. RENUNCIATION BY HOLDER. The holder may expressly renounce his rights against any party to the instrument, before, at or after its maturity. An absolute and unconditional renunciation of its rights against the principal debtor made at or after the maturity of the instrument, discharges the instrument. But a renunciation does not affect the rights of a holder in due course without notice. A renunciation must be in writing, unless the instrument is delivered up to the person primarily liable thereon Note that renunciation is order to discharge the secondary parties in whose favor it is made, may take place even before maturity, unlike in the case of the discharge of the instrument where renunciation must take place at or after maturity h. by taking a qualified acceptance Sec. 142. RIGHTS OF PARTIES AS TO QUALIFIED ACCEPTANCE. The holder may refuse to take qualified acceptance, and if he does not obtain an unqualified acceptance, he may treat the bill as dishonored by non-acceptance. Where a qualified acceptance is taken, the drawer and indorsers are discharged from liability on the bill, unless they have expressly or impliedly authorized the holder to take a qualified acceptance, or subsequently assent thereto.

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thereof against any intervening party to whom he was personally liable Sec 121 refers to payment at or after maturity, because if made before maturity it is not payment but negotiation, or purchase and is governed by Sec 50. The latter section also governs all other methods of reacquisition, such as by gift. In both cases, the instrument is not discharged and the reacquirer may negotiate the instrument. Thus a regular indorser who has paid a note to the holder may sue the maker and prior parties. But the reacquirer may not go against parties to whom he was liable prior to reacquisition because Sec 121 provides that he is remitted to his former rights and Sec 50 expressly denies him that right. However, unless their indorsements are cancelled, such intervening parties are not discharged as to parties other than the reacquirer. What if the reacquirer further negotiated the instrument, can the purchaser from the reacquirer hold the intervening parties liable? Since unless their indorsements are cancelled, such intervening parties are not discharged, it is reasonable to conclude that the denial of a right of recourse to a reacquirer is personal to him and that such intervening parties remain liable on the instrument to parties subsequent to the reacquirer The continuance of the liability of secondary parties under Sec 121 is of course conditioned on the instrument having been duly presented, dishonored and due notice of dishonor given them The above rule that reacquisition of a negotiable instrument by a secondary party does not discharge it and that the reacquirer may renegotiate the same, does not apply where the instrument is payable to the order of a third person and the drawer has paid it. This exception may operate unjustly because it would deny the drawer who pays the instrument the right to sue the acceptor. It has been suggested therefore that this exception should refer only to the reacquirers right to renegotiate and not to the rule that the instrument is not discharged i.e., payment by the drawer will not discharge the instrument but he may not renegotiate the same Another exception recognized by Sec 121 is that where payment is made by a secondary party who is the principal debtor on the instrument, the instrument is discharged. This rule is similar to that in Sec 119 (a) and (b). Thus, the principal debtor has no right to sue the accommodation maker or acceptor. If the one who pays and reacquires the instrument is an accommodation indorser, the clause remitted to his former rights should not apply to him. If he is remitted to his former rights, he would not have the right to recover, except from the accommodated party, since he gave no value for the instrument. But if he gave value at the time of his reacquisition, he should be allowed to

When the drawer or an endorser receives notice of a qualified acceptance, he must within a reasonable time express his dissent to the holder or he will be deemed to have assented thereto. i. by failure to make due presentment

Sec. 70. PRESENTMENT FOR PAYMENT; EFFECT ON PARTIES. X X X .But except as herein otherwise provided, presentment for payment is necessary in order to charge the drawer and indorsers Sec. 144. WHEN FAILURE TO PRESENT RELEASES DRAWER AND INDORSER. Except as herein otherwise provided, the holder of a bill which is required by the next preceding section to be presented for acceptance must either present it for acceptance or negotiate it within a reasonable time. If he fails to do so, the drawer and all indorsers are discharged j. by failure to give notice of dishonor

Sec. 89. TO WHOM NOTICE OF DISHONOR MUST BE GIVEN. Except as herein otherwise provided, when a negotiable instrument has been dishonored by non-acceptance or non-payment, notice of dishonor must be given to the drawer and to each indorser, and any drawer or indorser to whom such notice is not given is discharged k. certification of check at the instance of holder Sec. 188. EFFECT WHERE THE HOLDER OF A CHECK PROCURES IT TO BE ACCEPTED OR CERTIFIED. Where the holder of a check procures it to be accepted or certified, the drawer and all indorsers are discharged from liability thereon. l. effect of reacquisition by prior party

Sec. 121. RIGHT OF PARTY WHO DISCHARGES INSTRUMENT. Where the instrument is paid by a party secondarily liable thereon, it is not discharged; but the party so paying it is remitted to his former rights as regards all prior parties, and he may strike out his own and all subsequent indorsements, and again negotiate the instrument except: where it is payable to the order of a third person, and has been paid by the drawer; where it was made or accepted for accommodation, and has been paid by the party accommodated Sec. 50. WHERE PRIOR PARTY MAY NEGOTIATE THE INSTRUMENT. Where an instrument is negotiated back to a prior party, such party may, subject to the provisions of this Act, reissue and further negotiate the same. But he is not entitled to enforce payment

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FIVE THOUSAND PESOS Payable on 30 days notice to the order of Marinelle Siojo on the return of this Certificate properly indorsed with interest at four per centum per annum if left for six months or more No interest after two years (sgd.) Annabelle Rodriguez Cashier This certificate is not subject to check. 2. bonds and debentures

recover, and the application of the clause remitted to his former rights would obviously be unjust. All that this clause was intended to accomplish was to prevent any reacquiring party from holding liable any party to whom the reacquiring party himself was liable. The clause has the same meaning as the rule expressed in Sec 50 Chapter 7: Other Forms of Commercial Paper 3 Major types of commercial papers commercial paper which are also negotiable instrument because they are merely special forms of promissory notes and bills of exchange; governing law is the NIL commercial paper which though not governed by the NIL, have certain attributes of negotiability, thus they are quasi-negotiable commercial paper which are termed negotiable documents of title (as distinguished from negotiable instruments) 1. certificate of deposit

A certificate of deposit is a receipt of a bank for a certain sum of money received upon deposit and is generally framed in such for as to constitute a promissory note, payable to the depositor, or to the depositor or order, or to bearer. It may be payable on demand or at a fixed time. It may either be negotiable or non-negotiable. If such certificate meets all the requirements of Sec 1 of the NIL, then it is undoubtedly a negotiable instrument governed by such law. The fact that payment may not be made unless the certificate of deposit be returned does not render payment subject to a contingency because the law implies the duty to return the certificate just as it implies the duty to return a note upon payment When a depositor in a bank wants his money ready to be used as payment at any time, he opens a checking account from which he can withdraw by issuing a check. But when such depositor does not need his money for some extended period of time and wants it to earn interest, he can take a certificate of deposit instead. It is therefore more of an investment paper than a commercial one because it is usually not attendant to a commercial transaction the way a check or promissory note is. The following is a form of a certificate of deposit: THE PHILIPPINE NATIONAL BANK No. P5,000 Manila, Philippines September 30, 1971

Bonds are issued by the government, municipal and other public corporations, and by all sorts of private corporations. They are evidences of indebtedness, in the nature of promissory notes, promising to pay a sum of money on a day certain in the future. They run for long periods of time ten, twenty, thirty years, and are often sold to the public in general. Funds generated by such bonds are used to finance corporate projects and public works. They are usually accompanied by a mortgage of the property of the issuer. Although not to mature for a long time, bonds assure some regular income to bondholders in the form of interest, usually payable annually. These interest obligations may be evidenced by coupon attached to the bond and which are usually detachable. If interest is payable annually, there will usually be as many interest coupons as the number of years the bond is to remain outstanding. Both the bond and the interest coupons may be negotiable in form, in which case they will be governed by the NIL. An interest coupon may be detached from the bond and negotiated separately. The bond itself may be negotiated. Both are actually promissory notes, representing the promise of the issuer to pay the amount thereof on the date specified therein. Each interest coupon in itself a separate instrument containing a distinct and independent promise to pay the sum specified. The holder of the coupon need not be the owner of the bond in order to recover thereon. That the NIL governs and includes negotiable bonds is beyond doubt. The last clause of Sec 65 which enumerates the liabilities of a qualified indorser and a negotiator by delivery provides: the provisions of subdivision (c) of this section do not apply to persons negotiating public or corporate securities, other than bills and notes. There is no warranty on the part of such indorser or the negotiator that prior parties had capacity to contract. The qualified indorser and negotiator by delivery of a bond

This certifies that Marinelle Siojo has deposited in this bank

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The following are the provisions found in the Code of Commerce regarding letters of credit. Since they have not been repealed by any law, they remain in force Art. 567. Letters of Credit are those issued by one merchant to another for the purpose of attending to a commercial transaction Art. 568. The essential conditions of letters of credit shall be: 1. to be issued in favor of a definite person, and not to order 2. to be limited to a fixed and specified amount, or to one or more undetermined amount, but all within a maximum the limit of which has to be stated exactly. Those which do not have any of these last circumstances shall be considered as mere letters of recommendation Art. 569. The drawer of a letter of credit shall be liable to the person on whom it was issued, for the amount paid by virtue thereof, within the maximum fixed therein. Letters of credit may not be protested even should they not be paid, nor shall the bearer thereof acquire any right of action by reason of such non-payment against the person who issued it The person paying shall have the right to demand the proof of the identity of the person in whose favor the letter of credit was issued Art. 570. The drawer of a letter of credit may annul it, informing the bearer and the person to whom it is addressed of such revocation Art. 571. The bearer of a letter of credit shall pay the amount received to the drawer without delay. Should he not do so, an action involving execution may be brought to recover it, with legal interest and the current exchange in the place where payment was made, on the place where it is repaid. Art. 572. If the bearer of a letter of credit does not make use thereof within the period agreed upon with the drawer, or, in default of a period fixed, within six months, counted from its date, in any point in the Philippines, and within twelve months anywhere outside thereof, it shall be void in fact and in law. Under Art. 568, a letter of credit must be issued in favor of a definite person, and not to order. Under our law therefore, a letter of credit cannot be negotiable because it may not contain the words of negotiability. Furthermore, a letter of credit may be, and is oftentimes, issued for an undetermined amount, the only requirement of the Code of Commerce being that a maximum amount

do not warrant therefore that the corporation which issued the bonds has any judicial capacity to act. A general indorser thereof however would be liable for such want of capacity Debentures are similar to bonds except they are usually for a shorter term and may or may not be accompanied by a mortgage. They are often issued on the general credit of the issuer corporation 3. drafts and letters of credit

A draft is a form of bill of exchange generally used to facilitate transactions between persons physically remote from each other. Many of these cases involve drafts. A letter of credit is one whereby one person requests some other person to advance money or give credit to a third person, and promises that he will repay the same to the person making the advancement, or accept bills drawn upon himself for the like amount. The draft and the letter of credit are generally used together to effect payment in international transactions. Buyer Co. in Manila wants to order some equipment from Seller Co. in Chicago, Illinois. The latter may be reluctant to rely on a mere promise to pay of a distant buyer. Buyer Co. on the other hand would be reluctant to send payment lest the equipment not be shipped by the seller-stranger. Seller Co. may therefore ask Buyer Co. to obtain a letter of credit from a Manila Bank. Buyer Co. then applies to his bank which issues a letter of credit in favor of Seller Co. By such letter of credit, the bank engages to honor Seller Co.s draft drawn on it provided it is accompanied by the bill of lading covering the equipment, and other specified documents. Seller Co. then ships the equipment and sends the draft together with the bill of lading and other documents to the bank in Manila which either pays or accepts the draft, depending on its arrangements with Buyer Co. The documents are thereafter delivered to Buyer Co. after charging the amount of the draft against the latters account. Buyer Co. gets its equipment, and Seller Co. has been paid or has a bankers acceptance. The Manila bank has lent its credit but has parted with no funds. It of course charges Buyer Co. a fee for its services. In case the bank accepted the draft, Buyer Co. will deliver the necessary amount to the bank before maturity thereof. The following is an illustration of a draft:
P5,000 September 30, 1971

On arrival of goods pay to the order of Seller Co., Five Thousand and 00/100 Pesos. Value received and charge the same to account of Buyer Co. Seller Co. By: John Smith To: Manila Bank Ayala Building Ayala Ave, Makati Rizal, Philippines

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where the owner thereof has entrusted the wrongdoer with the possession of such certificate and clothed him with apparent ownership thereof. In other words, stock certificates are not negotiable, but only quasinegotiable. The Uniform Stock Transfer Act of the United States, which has been adopted by the majority of the states, goes further and in effect, gives full negotiability to certificates of stock. Under this statute, transfers of stock certificates indorsed in blank are valid even though such transfers are without the authority of the true owner, unless there is bad faith on the part of the transferee of such certificate or failure by him to take cognizance of circumstances giving notice that the transfer was wrongful. The test is common honesty and the degree of care exercised. Courts in construing and applying this Act, hold that the owner of a certificate indorsed in blank will lose his title even as against a bona fide purchaser from a thief. This statute, however, has not been adopted in this jurisdiction, but the Supreme Court has at least applied the common law theory of quasi-negotiability of certificate of stock. See case: Sta. Maria v. HSBC 89 Phil 780 (1951) See case: Delos Santos, et al. v. McGrath, Attorney General of the United States 96 Phil 577 (1955) See case: Capco v. Macasaet, Feliciano and CA 189 SCRA 561 5. negotiable documents of title a. in general

should be stated. This again will prevent it from being a negotiable instrument because it will not be for a sum certain in money as understood under the NIL. Thus, under present provisions of our law, a letter of credit cannot be considered a negotiable instrument. See case: Gregorio Araneta, Inc. v. PNB 95 Phil. 160 (1954) See case: National Rice and Corn Corp. v. PanPhilippine Shipping, Inc. 51 OG No. 11 5654 See case: BPI v. De Reny Fabric Industries, Inc. at al. 35 SCRA 256 (1970) 4. certificate of stock

The certificate of stock or share certificate is the customary and convenient evidence of the holders interest in the corporation which issues it. It does not contain any promise or order to pay money and is therefore not negotiable instrument, but is properly included in what is termed securities. Oftentimes, however, by the application of the principles of estoppel, and to effectuate the ends of justice and the intention of the parties, the courts decree a better title to the transferee than actually existed in his transferor, and as this result is the same as would be reached if the certificate were negotiable, share certificates are described as quasi-negotiable. On the back of the certificates of stock, there is usually a printed form of sale and assignment with an irrevocable power of attorney, authorizing the agent to take all the necessary steps to record the transfer on the books of the corporation. A blank is provided for the name of the transferee as well as for the name of the attorney-in-fact. When the shareholder signs this printed form without filling in the blanks, and the certificate is delivered to another, the latter appears to be the owner thereof. Under the general principle of common law recognized by the great weight of authority, a bona fide purchaser for value without notice from the third person entrusted with such certificate by the true owners, will be protected in his acquisition, although such third person has diverted the certificate from the purpose for which he was entrusted therewith. This principle rests on the theory that where a person confers on another all the indicia of ownership of property, he is estopped to assert title as against a third person who in good faith acquires it for value from the apparent owner. The same rule would apply if the stock certificates are in bearer form. The rule is inapplicable however where the certificate is lost or stolen while signed in blank. In such case even a purchaser in good faith cannot acquire title as against the true owner. In other words, at common law, stock certificates are given the attributes of negotiability only

Negotiable documents of title, as distinguished from negotiable instruments, refer to goods and not to money. They are therefore not governed by the NIL but by the pertinent provisions of the Civil Code (Articles 1507 1520). A document of title to goods includes any bill of lading, dock warrant, quedan, or warehouse receipt or order for the delivery of goods, or any other document used in the ordinary course of business in the sale or transfer of goods, as proof of the possession or control of the goods, or authorizing or purporting to authorize the possessor of the document to transfer or receive, either by indorsement or by delivery, goods represented by such document (Art 1636[1] CC). They are called documents of title because as a rule the sale of goods covered is effected by the transfer of said document. Whoever owns the document has title to the goods, unless the bailee never actually received the goods or the bailor had no title to the goods. These documents of title may be either negotiable or non- negotiable, depending on whether the goods represented thereby are deliverable to a specified person, to order or to bearer. In the last two cases, the document is said to be negotiable

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lading covering the goods is sent to the sellers agent in Manila. The latter (usually a bank), upon receiving the draft and bill of lading, presents the draft to the buyer for payment and until it is paid, will not deliver the bill of lading to the buyer.1 Upon receiving payment, he will indorse the bill of lading to the buyer who can then get delivery of goods from the carrier. The negotiable bill of lading in this case is therefore used to control delivery of goods as a means of securing payment therefore. c. negotiation

Negotiable as descriptive of a document of title has a similar meaning to the word as used to describe an instrument. A transferee in good faith, for value and without notice of any defect in the title of his transferor can acquire a better title to the goods than his transferor had (Art. 1518). This is true even if he took from one who stole the document, as long as the original bailor of the goods was the owner thereof or had apparent authority from the owner to deposit or deliver the goods to the bailor (Arts. 1513[1] and 1519, CC). From the point of view of the bailee, the most important difference between a negotiable document and nonnegotiable document is that in the former, he should deliver the goods represented thereby without demanding and acquiring the negotiable document, otherwise he would be liable for damages to whomever is the real owner of such goods (Art. 1519, CC) b. kinds and functions The most common types of negotiable documents of title are the warehouse receipt and the bill of lading. Warehouse receipt - an agreement by a warehouse man to store goods and deliver them to a named person or his order or to bearer Bill of lading - a similar contract by a carrier to ship goods and deliver them to the person named therein or his order, or to bearer - where the goods are to be delivered to a specified person, it is not negotiable and is called a straight bill. Otherwise, it is referred to as an order bill A negotiable document of title is valuable in commerce because it facilitates the sale and delivery of goods. To illustrate If Andoy has 1000 sacks of rice deposited in Paolos warehouse and for which Paolo has issued a negotiable receipt, Andoy can sell such rice to Inna by merely negotiating the receipt. Paolo would be obliged to recognize Innas rights as the new owner of the rice (Art. 1513[2]) The negotiable bill of lading is useful not only as evidence of the receipt of the goods by the carrier but as evidencing title to the goods covered by it. The owner of such bill of lading can sell the goods by merely negotiating it, and the carrier is bound to deliver the goods to the legal holder of the bill. We have also seen that the bill of lading is used to facilitate the purchase of goods by one person from another who is physically remote and probably unknown to him. When a draft is issued by a seller of goods in San Francisco, on the buyer of goods in Manila, the draft, together with the bill of

The means of negotiating a document of title are the same as those used in negotiable instrument. If by the terms of the document, the goods are deliverable to the order of a specified person, then it should be indorsed by such person, either specially or in blank (Art. 1509). If the goods are deliverable to bearer, or the document has been indorsed in blank, then negotiation may be by mere delivery (Art. 1515) However, 1510, although on the face of the document the goods are deliverable to bearer, if it should later be indorsed to a specified person, the latters indorsement will be necessary for further negotiation. This is different from the rule under the NIL where an originally bearer instrument, though specially indorsed may be further negotiated by mere delivery (Sec. 40, NIL). As in a negotiable instrument, if the negotiable document of title is transferred for value without indorsement, and such indorsement is essential for negotiation, the transferee may compel his transferor to indorse the same, unless a contrary intention appears, and the negotiation will take effect as of the time of actual indorsement (Art. 1508). The words not negotiable when stamped upon a document of title in which the goods are to be delivered to order or bearer, are a direct contradiction of the terms of the bill. Under the law, such words will not affect the status of the document as negotiable (Art. 1500). Thus, it has been held that the carrier is liable to the holder of an order bill of lading of the goods are delivered to the consignee without surrender of the bill, even though the latter was marked non-negotiable. d. rights of holder i. when free from personal defenses Under Art 1518 of the Civil Code, a holder of a negotiable document of title in good faith, for value and without notice is placed on the same level as a holder in
1

Sometimes an arrangement can be made with the bank by virtue of which the latter delivers the bill of lading to the buyer under a trust receipt. Under this arrangement, the buyer is to repay the bank from the proceeds of the goods which he is to hold in trust for the bank until full payment.

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Code adopted Sec 32 as originally worded but copied Sec 38 as amended. Theft of the document should not be confused with theft of the goods. Even a bona fide holder of a document issued over stolen goods cannot acquire title to such goods. ii. what title acquired Art. 1513. A person to whom a negotiable document of title has been duly negotiated acquires thereby: 1. such title to the goods as the person negotiating the document to him had or had ability to convey to a purchaser in good faith for value and also such title to the goods as the person to whose order the goods were to be delivered by the terms of the document had or had ability to convey to a purchaser in good faith for value; and 2. the direct obligation of the bailee issuing the document to hold possession of the goods for him according to the terms of the document as fully as if such bailee had contracted directly with him Art. 1514. A person to whom a document of title has been transferred, but not negotiated, acquires thereby, as against the transferor, the title to the goods, subject to the terms of any agreement with the transferor. If the document is non-negotiable, such person also acquires the right to notify the bailee who issued the document of the transfer thereof, and thereby to acquire the direct obligation of such bailee to hold possession of the goods for him according to the terms of the document Prior to the notification to such bailee by the transferor or transferee of a non-negotiable document of title, the title of the transferee to the goods and the right to acquire the obligation of such bailee may be defeated by the levy of an attachment of execution upon the goods by a creditor of the transferor, or by a notification to such bailee by the transferor or a subsequent purchaser from the transferor of a subsequent sale of the goods by the transferor
Art. 1519. If goods are delivered to a bailee by the owner or by a person whose act in conveying the title to them to a purchaser in good faith for value would bind the owner and a negotiable document of title is issued for them they cannot thereafter, while in possession of such bailee, be attached by garnishment or otherwise or be levied under an execution, unless the document be first surrendered to the bailee or its negotiation enjoined. The bailee shall in no case be compelled to deliver up the actual possession of the goods until the document is surrendered to him or impounded by the court

due course of a negotiable instrument i.e., personal defenses enumerated in said article are not available against him. It provides: Art. 1518. The validity of the negotiation of a negotiable document of title is not impaired by the fact that the negotiation was a breach of duty on the part of the person making the negotiation, or by the fact that the owner of the document was deprived of the possession of the same by loss, theft, fraud, accident, mistake, duress, or conversion, if the person to whom the document was negotiated or a person to whom the document is subsequently negotiated paid value therefore in good faith without notice of the breach of duty, or loss, theft, fraud, accident, mistake, duress, or conversion Under this article, the holder of a negotiable document of title in good faith, for value and without notice is treated a holder in due course of a negotiable instrument; i.e., personal defenses enumerated therein are not available against him. Thus, if a negotiable document which is stolen from its owner is negotiated to a holder in good faith and for value, the latter will have a better right to the goods covered by such document than the person from whom the document was stolen. Article 1518 however seems to conflict with Article 1512, which reads: Art. 1512. A negotiable document of title may be negotiated: 1. by the owner thereof; or 2. by any person to whom the possession or custody of the document has been entrusted by the owner, if, by the terms of the document the bailee issuing the document undertakes to deliver the goods to the order of the person to whom the possession or custody of the document has been entrusted, or if at the time of such entrusting the document is in such form that it may be negotiated by delivery Note that under this provision, only the owner of the document or a person entrusted by such owner can validly negotiate a document, even if it be a bearer one. Thus, under this article, a thief or finder of such document cannot effect a valid negotiation thereof because it was not entrusted to him by the owner. The inconsistency can perhaps be explained by the fact the Article 1512 of the Civil Code was copied from Sec 32 of the Uniform Sales Act before the latter was amended. Article 1518, on the other hand, was copied from Sec 38 of the Uniform Sales Act as amended, as originally drafted, both Sections 32 and 38 did not recognize the validity of a negotiation by a thief or finder even to a bona fide holder for value. Both were later amended to give full negotiability to negotiable documents of title. Unfortunately it seems that the Civil

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who is liable if the primary party fails to pay, the indorser of a negotiable document of title is not liable for the failure of the bailee to fulfill his obligation to deliver the goods (Art. 1517, CC). See case: Roman v. Asia Banking Corp 46 Phil. 705 (1922) See case: Siy Cong Bieng & Co. v. HSBC 56 Phil. 598 (1932)

A person to whom a negotiable document of title has been duly negotiated acquires the title of the person negotiating it as well as the title of the original bailor or depositor of the goods. Thus, if the original bailor or depositor of the goods was not the owner thereof or had no authority, express or implied, from such owner to deposit the goods, then the holder of the negotiable document, even if the negotiation to him was valid, cannot acquire title to the goods. On the other hand, even if the original bailor or depositor was the owner or had authority from the owner, if the negotiation to the present holders transferor was not valid, such holder, even if in good faith and for value, does not acquire any right to the goods. In both cases, the holders remedy if any, is against his transferor and/ or the guilty party In addition to acquiring title to the goods, the person to whom the document has been negotiated acquires the obligation of the bailee to make delivery to him, as if they had contracted directly with each other. There would therefore be no need on the part of the holder to notify the bailee of the transfer. By issuing a negotiable document of title, such bailee had given in advance his consent to hold the goods for any person to whom such document is negotiated. On the other hand, if the document is non-negotiable, notice of any transfer thereof should be given to the bailee and until such time, the transfer will not bind the bailee or any person other than the transferor. Thus, the transferees rights may be defeated by a levy of attachment on the goods or by a notification to the bailee of a sale of the goods to another purchaser Since a negotiable document of title represents the goods and may be dealt with safely on that assumption, a sale of the goods without the document will not prejudice a subsequent purchaser who takes the document in good faith and for value. The bailee cannot be compelled to deliver the goods to anyone unless the document is surrendered to him or in case of levy on execution, until it is impounded by the court, or its negotiation effectively enjoined. Thus, his delivery to the legal holder of the document would relieve him of any further responsibility for the goods e. liability of indorser

The indorsement of a negotiable document of title carries with it certain implied warranties by the indorser. As to the document, his warranty covers its genuineness, his legal right to negotiate it and his lack of knowledge of any fact which would impair its validity. As to the goods, he warrants that he has the right to transfer title thereto and that they are merchantable (Art 1516, CC). However, unlike the indorser of a negotiable instrument

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