negotiable instruments law - 1 file download

NEGOTIABLE INSTRUMENTS LAW

DEFINITION

A written contract for the payment of money which complies with the requirements of Sec. 1 of the Negotiable Instruments Law, which by its form and on its face, is intended as a substitute for money and passes from hand to hand as money, so as to give the holder in due course (HDC) the right to hold the instrument free from defenses available to prior parties.

FORM To determine whether the instrument is negotiable or not, the following must be considered: 1. The whole of the instrument 2. Those only appear on the face of the instrument 3. Compliance with the requirement under Section 1 of the Act. The instrument need not follow the language of the Negotiable Instruments Law, but any terms are sufficient which clearly indicate an intention to conform to the requirements hereof.

FEATURES

1. NEGOTIABILITY - it is that attribute or property whereby a bill or note or check may pass from hand to hand similar to money, so as to give the holder in due course the right to hold the instrument and to collect the sum payable for himself free from defenses.

2. ACCUMULATION OF SECONDARY CONTRACTS - secondary contracts are picked up and carried along with Negotiable Instruments as they are negotiated from one person to another; or in the course of negotiation of negotiable instruments, a series of juridical ties between the parties thereto arise either by law or by privity. The indorsers become secondarily liable to the holder

APPLICABILITY

The law applies only to negotiable instruments or those that meet the requirements under Sec. 1 of Act No. 2031.

INSTRUMENTS WITH LIMITED NEGOTIABILITY

1. Letter of credit - Payable to specified person. 2. Treasury warrant - Payable out of specific fund or appropriation,

hence conditional 3. Postal money order - Subject to restriction and limitation under

postal laws and regulation. (1 indorsement is allowed) 4. Bill of lading - Not contain an unconditional promise or order to pay

a sum certain in money 5. Certificate of stock - Not contain an unconditional promise or order

to pay a sum certain in money 6. Warehouse receipt - Not contain an unconditional promise or order

to pay a sum certain in money. 7. Quedan - Not contain an unconditional promise or order to pay a

sum certain in money. 8. Now account - Not payable to order or bearer

NEGOTIABLE VS. NON-NEGOTIABLE INSTRUMENTS

NEGOTIABLE NON-NEGOTIABLE

Requires compliance with Sec. 1 of the NIL

Did not comply with the requirements of Sec. 1 of the NIL

Transfer can be by negotiation or assignment

Transfer can only be made by assignment

Holder in due course acquires the instrument free from defenses personal to the prior parties

Transferee does not acquire title better than the transferor. Hence, subject to personal defenses of prior parties

Prior parties have a warranty as to payment

Prior parties warrant only that they have legal title

Governed by NIL NIL only applies by analogy

Only real defenses are available against holder

Both real and personal defenses are available against the holder

KINDS OF NEGOTIABLE INSTRUMENTS

1. PROMISSORY NOTES – An unconditional promise in writing mace 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.

2. BILLS OF EXCHANGE – 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 bearer.

PROMISSORY NOTES VS. BILLS OF EXCHANGE

PROMISSORY NOTES BILLS OF EXCHANGE

2 parties – Maker and Payee

3 parties – Drawer, Payee and Drawee

There is unconditional PROMISE by the maker

There is unconditional ORDER by the drawer to the drawee

Presentment for payment without prior acceptance

Some Bills need prior acceptance by the drawee before presentment for payment

Liability of the maker is primary and absolute

Liability of the drawer is secondary and conditional

WHEN MAY A BILL BE TREATED AS A NOTE?

1. The drawer and drawee are the same person 2. The drawee is a fictitious person 3. The drawee is a person not having capacity to contract 4. Where the instrument is so ambiguous that there is doubt

whether it is a bill or note The holder may treat the instrument at his option either as a bill of exchange or as a promissory note.

QUESTION

D drew a bill of exchange as follows: In this case, the instrument is: A. The instrument is negotiable and may be treated only as a bill of

exchange B. The instrument is non-negotiable and may be treated only as a bill

of exchange C. The instrument is negotiable and may be treated as a promissory

note D. The instrument is non-negotiable and may be treated as a

promissory note

To: Aquaman

Pay P or order P100,000 and reimburse yourself from my

account with you

Sgd. D

QUESTION

D drew a bill of exchange as follows: In this case, the instrument is: A. The instrument is negotiable and may be treated only as a bill of

exchange B. The instrument is non-negotiable and may be treated only as a bill

of exchange C. The instrument is negotiable and may be treated as a

promissory note D. The instrument is non-negotiable and may be treated as a

promissory note

To: Aquaman

Pay P or order P100,000 and reimburse yourself from my

account with you

Sgd. D

REQUISITES OF NEGOTIABILITY

An instrument to be negotiable must conform to the following requirements (WUPOA):

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.

QUESTION

Which of the following requisites of negotiability does not apply to a promissory note?

A. It must be in writing and signed by the maker or drawer B. Must contain an unconditional promise or order to pay a sum

certain in money C. Must be payable on demand, or at a fixed or determinable

future time D. Must be payable to order or to bearer E. Where the instrument is addressed to a drawee, he must be

named or otherwise indicated therein with reasonable certainty.

QUESTION

Which of the following requisites of negotiability does not apply to a promissory note?

A. It must be in writing and signed by the maker or drawer B. Must contain an unconditional promise or order to pay a sum

certain in money C. Must be payable on demand, or at a fixed or determinable

future time D. Must be payable to order or to bearer E. Where the instrument is addressed to a drawee, he

must be named or otherwise indicated therein with reasonable certainty.

QUESTION

Which of the following is not a requisite of negotiability of a promissory note: A. That the instrument is written and signed by the drawer B. That the instrument contains an unconditional promise to pay

a sum certain in money C. That the instrument is payable on demand or at a fixed or

determinable future time D. That the instrument is payable to order or to bearer.

QUESTION

Which of the following is not a requisite of negotiability of a promissory note: A. That the instrument is written and signed by the

drawer B. That the instrument contains an unconditional promise to pay

a sum certain in money C. That the instrument is payable on demand or at a fixed or

determinable future time D. That the instrument is payable to order or to bearer.

1. IT MUST BE IN WRITING AND SIGNED BY THE MAKER OR DRAWER

“Written” includes printed, and “writing” includes print. Signature of the maker or drawer is usually written, preferably with the full name or at least the surname. However, initials or any mark will be sufficient, provided that such signature be used as a substitute and the maker or drawer intends to be bound by it.


General Rule: No person is liable on the instrument whose signature does not appear thereon (Sec. 18) Exceptions: 1. 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 18, (2))

2. The principal is bound by the signature of his duly authorized agent (Sec 19)

3. Forgery (Sec 23) 4. Acceptance by the acceptor in a separate paper (Sec 134) 5. Written promise by a person to accept the bill before it is

drawn. (Sec 135)


Presumptions: 1. 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 be deemed an indorser; (Sec 17, f)

2. A person placing his signature upon an instrument otherwise than as maker, drawer, or acceptor, is deemed to be indorser unless he clearly indicates by appropriate words his intention to be bound in some other capacity. (Sec 63)

2. IT MUST CONTAIN AN UNCONDITIONAL PROMISE OR ODER TO PAY A SUM CERTAIN IN MONEY

UNCONDITIONAL PROMISE OR ORDER: An unqualified order or promise to pay is unconditional though coupled with:

a. 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

b. 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.


A SUM CERTAIN IN MONEY The sum payable is a sum certain, although it is to be paid: a. with interest; or b. by stated installments; or c. by stated installments, with a provision that, upon default in

payment of any installment or of interest, the whole shall become due; or

d. with exchange, whether at a fixed rate or at the current rate; or

e. with costs of collection or an attorney's fee, in case payment shall not be made at maturity.


ADDITIONAL PROVISIONS General Rule: An instrument which contains an order or promise to do any act in addition to the payment of money is not negotiable.

Exceptions: a. If it is at the option of the holder. b. The act is to be performed after non-payment, such as:

i. authorizes the sale of collateral securities ii. authorizes a confession of judgment iii. waives the benefit of any law intended for the advantage

or protection of the obligor


OMISSIONS; SEAL; PARTICULAR MONEY: The validity and negotiable character of an instrument are not affected by the fact that:

a. it is not dated; or b. does not specify the value given, or that any value had

been given therefor; or c. does not specify the place where it is drawn or the place

where it is payable; or d. bears a seal; or e. designates a particular kind of current money in which

payment is to be made.

QUESTION

Which of the following is not negotiable? A. I promise to pay B or bearer P10,000 in 2 equal installments

of P5,000 each. Sgd. A B. I promise to pay B or order P10,000 or deliver 5 sacks of rice,

at his option. Sgd. A C. I promise to pay to the order of B P10,000 in 5 equal monthly

installments due at the end of each month from issuance. However, if I miss one installment, the whole remaining amount shall become due and demandable. Sgd. A

D. I promise to pay bearer P10,000, 60 days from issuance, subject to a one month extension at the option of the maker. Sgd. A

QUESTION

Which of the following is not negotiable? A. I promise to pay B or bearer P10,000 in 2 equal

installments of P5,000 each. Sgd. A B. I promise to pay B or order P10,000 or deliver 5 sacks of rice,

at his option. Sgd. A C. I promise to pay to the order of B P10,000 in 5 equal monthly

installments due at the end of each month from issuance. However, if I miss one installment, the whole remaining amount shall become due and demandable. Sgd. A

D. I promise to pay bearer P10,000, 60 days from issuance, subject to a one month extension at the option of the maker. Sgd. A

3. PAYABLE ON DEMAND OR AT A FIXED OR DETERMINABLE FUTURE TIME

WHEN PAYABLE ON DEMAND: An instrument is payable on demand: a. When it is so expressed to be payable on demand, or at sight,

or on presentation; or b. 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.

3. PAYABLE ON DEMAND OR AT A FIXED OR DETERMINABLE FUTURE TIME

WHEN PAYABLE AT A DETERMINABLE FUTURE TIME: An instrument is payable at a determinable future time, within the meaning of this Act, which is expressed to be payable: a. At a fixed period after date or sight; or b. On or before a fixed or determinable future time specified

therein; or c. 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.

4. PAYABLE TO ORDER OR BEARER

WHEN PAYABLE TO ORDER: The instrument is payable to order where it is drawn payable to the: 1. Order of a specified person or 2. To him or his order. PAYEE: It may be drawn payable to the order of: a. A payee who is not maker, drawer, or drawee; or b. The drawer or maker; or c. The drawee; or d. Two or more payees jointly; or e. One or some of several payees; or f. 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.

4. PAYABLE TO ORDER OR BEARER

WHEN PAYABLE TO BEARER: The instrument is payable to bearer: a. When it is expressed to be so payable; or b. When it is payable to a person named therein or bearer; or c. 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

d. When the name of the payee does not purport to be the name of any person; or

e. When the only or last indorsement is an indorsement in blank

5. IDENTITY OF DRAWEE

This requisite pertains only to a Bill of Exchange since a Promissory Note does not have a Drawee. Two or More Drawees: 1. Jointly – allowed; 2. Alternative or in Succession – not allowed.

QUESTION

An instrument reads:

February 19, 2019

BGC, Taguig City

P1,000,000

30 days after date, I promise to pay Gretchen Yona or his

authorized representative the sum of one million pesos

(P1,000,000) from my Maybank Account number 667183029

if, by this due date, the sun still sets in the west to usher in

the evening and rises in the east the following morning to

welcome the day.

Sgd. Donnabel Calleja

QUESTION

The instrument is not negotiable because: I. It is not signed by the maker II. It does not contain an unconditional promise to pay a sum

certain in money III. It is not payable on demand, or at a fixed, or determinable

future time IV. It is not payable to order or to bearer

A. I, II, III and IV C. II and III only B. II, III and IV only D. II and IV only

QUESTION

Which of the following is a negotiable instrument? A. Pay P or order P10,000 on 30 days after date sgd. D B. I promise to pay X or bearer P200,000 in two equal

installments of P100,000 each sgd. M C. I promise to pay bearer P20,000 on March 20, 2019, sgd. M D. Pay P or bearer P50,000 30 days after the death of X sgd. D

QUESTION

Which of the following is a negotiable instrument? A. Pay P or order P10,000 on 30 days after date sgd. D B. I promise to pay X or bearer P200,000 in two equal

installments of P100,000 each sgd. M C. I promise to pay bearer P20,000 on March 20, 2019,

sgd. M D. Pay P or bearer P50,000 30 days after the death of X sgd. D

QUESTION

Which of the following is not a negotiable instrument? A. Pay to the order of P P100,000 at UST, Espana, Manila. Sgd. D

to X, UST, Espana, Manila; Accepted: Payable at 1 Loans St. Proj. 8, QC. Sgd. X

B. Pay to X P50,000. Sgd. D to X; Accepted: For entire amount Sgd. X

C. Pay to P or bearer P20,000. Sgd. M to D; Accepted: For P10,000 only Sgd. D

D. Pay to Gelo or bearer P10,000. Sgd. Kim to Don and Tyron; Accepted: If Gelo graduates by 2018. Sgd. Don

PROVISIONS ON JOINT PARTIES

As to payees and indorsees: 1. There may be two or more payees jointly; 2. There may be one or some of several payees. 3. 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 to indorse for the others. (Sec 41)

4. Joint payees or joint indorsees who indorse are deemed to indorse jointly and severally. (Sec 68)

5. Notice to joint persons who are not partners must be given to each of them unless one of them has authority to receive such notice for the others. (Sec 100)

6. An indorsement which purports to transfer to two or more indorsees severally, does not operate as a negotiation of the instrument. (Sec 32)


As to persons liable on the instrument: 1. “I promise to pay" is signed by two or more persons, they are

deemed to be jointly and severally liable thereon. (Sec 17 g) 2. Where there are several persons, not partners (Joint debtors),

primarily liable on the instrument and no place of payment is specified, presentment must be made to them all (Sec 78)

3. Where two or more persons offer to pay a bill for the honor of different parties, the person whose payment will discharge most parties to the bill is to be given the preference. (Sec 174)


As to drawees: 1. 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 128)

2. 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. (Sec 145)

RULES ON DATE

1. The validity and negotiable character of an instrument are not affected by the fact that (a) It is not dated; (Sec 6)

2. Where the instrument or 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 11)

3. The instrument is not invalid for the reason only that it is ante-dated or post-dated, 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. (Sec 12)

RULES ON DATE

4. 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 avoid 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 date may be inserted in the following cases: a. Where an instrument expressed to be payable at a fixed

period after date is issued undated (e.g. 30 days after date, pay to the order of X (Sgd Y)

b. Where the acceptance of an instrument payable at a fixed period after sight is undated (e.g. 30 days after sight, pay to the order of X (sgd Y))

RULES ON DATE

5. Where the instrument is not dated, it will be considered to be dated as of the time it was issued. (Sec 17, c)

6. 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 was overdue. (Sec 45)

7. Any alteration which changes the: a.) The date (Sec 124) – is considered Material Alteration.

QUESTION

On January 1, 2019, D issued a check to X for P10,000 without indicating any date on the check. In this case:

I. If X indicated in the check a date other than Jan. 1, 2019,

the same will not invalidate the instrument. II. If X negotiated the note to A on September 30, 2019 and put

July 1, 2019 as the date, such date is controlling if A is a holder in due course.

III. If X negotiated the note to A on September 1, 2019, A can still enforce the instrument against D by putting July 1, 2019 as the date.

Which of the above is true? A. I, II and III C. I and III only B. I and II only D. II and III only

CONSTRUCTION WHERE INSTRUMENT IS AMBIGUOUS

Where the language of the instrument is ambiguous or there are omissions therein, the following rules of construction apply:

a. 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;

b. 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 instrument is undated, from the issue thereof;

c. Where the instrument is not dated, it will be considered to be dated as of the time it was issued;

d. Where there is a conflict between the written and printed provisions of the instrument, the written provisions prevail;

CONSTRUCTION WHERE INSTRUMENT IS AMBIGUOUS

e. 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;

f. 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 be deemed an indorser;

g. Where an instrument containing the word "I promise to pay" is signed by two or more persons, they are deemed to be jointly and severally liable thereon.

FORGERY

When a signature is forged or made without the 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 therefor, 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. A forged signature, whether it be that of the drawer, maker, payee or any other party, is wholly inoperative and no one can gain title to the instrument through such forged signature against parties prior to the forgery.

FORGERY

Forgery of Maker’s Signature – the maker is not liable to all subsequent parties whether the instrument is an order or bearer instrument. However, indorsers after the forgery are still secondarily liable to the holder by virtue of their warranty. Forgery of Indorser’s Signature in a promissory note payable to ORDER – Where the instrument of the payee is forged in a note payable to order, the instrument cannot be enforced against the payee and the maker. But the indorsers after the forgery are liable because they warrant that they have good title to the instrument.

FORGERY

Forgery of Indorser’s Signature in a promissory note (or Bill of Exchange) payable to BEARER – the signature of the payee or holder is unnecessary to pass title to the instrument. Hence, the maker may still be liable to a holder in due course even if an indorsement was forged after the issuance of the note since according to Sec. 60 he is to pay the instrument “according to its tenor” and considering that the “tenor” of the instrument is that he engages to pay any bearer of the instrument. However, if the holder is not a holder in due course, the person whose signature is forged may raise the defense of non-delivery of a complete instrument

QUESTION

A makes a promissory note payable to B or bearer. A delivered the note to B. B indorsed the note to C. C placed the note in his wallet which was stolen by X, who, finding the note, indorsed it to D by forging C’s signature. D indorsed the note to E, who in turn delivered the note to F, a holder in due course. Which is not correct? A. A is liable to F, who is a holder in due course B. F may go against D because his signature is genuine C. F can go against E because he is F’s immediate transferor D. If F was not a holder in due course, B or C can validly raise

the defense of non-delivery of a complete instrument.

FORGERY

Forgery of Drawer’s Signature – barring gross negligence on the part of the drawer where his signature is forged, he is not liable whether or not the instrument is payable to bearer or order because the drawer was never a party to the instrument – he did not promise to pay anybody. Forgery of Indorser’s Signature in a bill of exchange payable to ORDER – subsequent holders cannot enforce payment against the drawee, drawer, payee or the indorser whose signature was forged, or those parties prior to the forged indorsement. Indorsers AFTER the forgery are still secondarily liable because of their warranties.

QUESTION

A makes a note payable to the order of B. B indorses it to C. X obtains possession of the note fraudulently and indorses it to D, and D to E. Which of the following is not correct? A. C can recover from A and B because his rights against them

were not affected by the forgery. B. E cannot enforce the note against C because of C’s signature

is wholly inoperative. C. E cannot enforce the note against A and B because E’s rights

against them are cut-off by the forged signature of C which is inoperative.

D. E cannot enforce the note against D who derived his title through the forged signature of C which is wholly inoperative.

FORGERY

Situation with a COLLECTING BANK 1. Drawer and Collecting Bank – the drawer cannot opt to

recover from the collecting bank since there is no privity of contract between him and the collecting bank

2. Warranty of Collecting Bank - The collecting bank which indorses a check bearing a forged indorsement and presents it to the drawee bank guarantees all prior indorsements, including the forged indorsement itself, and ultimately should be held liable therefor. An EXCEPTION is when the issuance of the check itself was attended with negligence.

3. Recourse of Collecting Bank – the collecting bank may recover from its depositor who had not given value for the money paid to him.

QUESTION

A executes a check drawn against XYZ Bank payable to the order of B. Later, C stole the check and forged the indorsement of B. C deposited the check in ABC Bank by way of savings deposit. When the check was cleared. C withdrew the money from ABC Bank. Who shall bear the loss? A. A, because the check was complete when delivered to B. B. XYZ Bank, because the indorsement of the payee was forged. C. ABC Bank, because it is bound to investigate the genuineness

of the indorsement. D. A, B, C, XYZ Bank, and ABC Bank pro-rata

QUESTION

A executes a check drawn against XYZ Bank payable to the order of B. Later, C stole the check and forged the indorsement of B. C deposited the check in ABC Bank by way of savings deposit. When the check was cleared. C withdrew the money from ABC Bank. Who shall bear the loss? A. A, because the check was complete when delivered to B. B. XYZ Bank, because the indorsement of the payee was forged. C. ABC Bank, because it is bound to investigate the

genuineness of the indorsement. D. A, B, C, XYZ Bank, and ABC Bank pro-rata

CONSIDERATION

1. 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 24)

2. Value is any consideration sufficient to support a simple contract. An antecedent or pre-existing debt constitutes value; and is deemed such whether the instrument is payable on demand or at a future time. (Sec 25)

3. What constitutes holder for value. Where value has at any time been given for the instrument, the holder is deemed a holder for value in respect to all parties who become such prior to that time. (Sec 26)

4. When lien on instrument constitutes holder for value. Where the holder has a lien on the instrument arising either from contract or by implication of law, he is deemed a holder for value to the extent of his lien. (Sec 27)

CONSIDERATION 5. Effect of want of consideration. Absence or failure of

consideration is a matter of defense as against any person not a holder in due course; and partial failure of consideration is a defense pro tanto, whether the failure is an ascertained and liquidated amount or otherwise. (Sec 28)

6. An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. 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. 29)

ISSUANCE AND DELIVERY

"Delivery" means transfer of possession, actual or constructive, from one person to another.

"Issue" means the first delivery of the instrument, complete in form, to a person who takes it as a holder.

NEGOTIATION

Negotiation is when an instrument transferred from one person to another in such manner as to constitute the transferee the holder thereof.

How made: 1. Bearer Instrument – Delivery 2. Order Instrument – Indorsement + Delivery.

Assignment is the transfer of the title to an instrument, with the assignee generally taking only such title or rights as his assignor has, subject to all defenses available against his assignor.

NEGOTIATION VS. ASSIGNMENT

NEGOTIATION ASSIGNMENT

Applicable Law Negotiable

Instruments Law

Civil Code of the

Philippines

Type of

transaction or

instrument:

Negotiable

instruments only

Contracts in general or

assignable rights

Nature of the

transferee:

Transferee is a

holder who may

be a holder in due

course

Transferee is a mere

assignee and can never

be a holder in due

course

NEGOTIATION VS. ASSIGNMENT

NEGOTIATION ASSIGNMENT

Rights

acquired:

The transferee-holder

may acquire more

rights than the

transferor if he is a

holder in due course

Transferee cannot

acquire more rights than

the transferor because

he merely steps into the

shoes of the transferor

Availability

of personal

defenses

Transferee-holder may

be free from personal

defenses if he is a

holder in due course

Transferee is always

subject to personal

defenses

QUESTION

M issued a promissory note to A or order for P5,000 payable on March 31, 2019. Later, A delivered the note to B on March 1, 2019. In this case, A. B is considered a holder in due course absent any facts to the

contrary B. B is not a holder in due course C. There was proper negotiation by A to B D. A cannot validly negotiate the note

NEGOTIATION OF A BEARER INSTRUMENT

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 40)

An instrument payable to bearer is not converted into an instrument payable to order by being indorsed specially.

Instruments originally payable to order: Sec. 40 does not apply to instruments originally payable to order which was indorsed in blank.


Where a person places his indorsement on an instrument negotiable by delivery, he incurs all the liability of an indorser. (Sec. 67)

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. (Sec 48)


Every person negotiating an instrument by delivery warrants: 1. That the instrument is genuine and in all respects what it

purports to be; 2. That he has a 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. The warranty however, extends in favor of no holder other than the immediate transferee. (Sec 65)

QUESTION

M issued a bill of exchange which was pre-accepted by D, payable to P or bearer in the amount of P100,000 on December 31, 2019. P never delivered the goods for which the bill was issued but nevertheless delivered the note to K who had knowledge of the failure of consideration; then K to J; then J to L; then L to H. In the event that D dishonors the bill, H can hold A. P, K, J and L liable being prior parties who negotiated the note B. L liable, since he is the immediate transferor of the note C. K, for his knowledge of the absence of consideration D. P, for his failure to deliver the goods

QUESTION

M issued a bill of exchange which was pre-accepted by D, payable to P or bearer in the amount of P100,000 on December 31, 2019. P never delivered the goods for which the bill was issued but nevertheless delivered the note to K who had knowledge of the failure of consideration; then K to J; then J to L; then L to H. In the event that D dishonors the bill, H can hold A. P, K, J and L liable being prior parties who negotiated the note B. L liable, since he is the immediate transferor of the

note C. K, for his knowledge of the absence of consideration D. P, for his failure to deliver the goods

QUESTION

M made the following promissory note: Which of the following is false? A. P indorsed the note to A and A indorsed it to B. P is liable to

both A and B. B. P indorses the note to X and X indorsed it to Y, Y can

negotiate the note to Z by mere delivery C. P delivered the note to A and A indorses it to B, P is liable to

both A and B. D. P delivered the note to X and X indorsed it to Y who indorsed

it to Z. Z can hold X and Y liable.

I promise to Pay P or bearer P20,000 payable on

March 31, 2018.

Sgd. M

QUESTION

M made the following promissory note: Which of the following is false? A. P indorsed the note to A and A indorsed it to B. P is liable to

both A and B. B. P indorses the note to X and X indorsed it to Y, Y can

negotiate the note to Z by mere delivery C. P delivered the note to A and A indorses it to B, P is

liable to both A and B. D. P delivered the note to X and X indorsed it to Y who indorsed

it to Z. Z can hold X and Y liable.

I promise to Pay P or bearer P20,000 payable on

March 31, 2018.

Sgd. M

INDORSEMENT

1. In case of an order instrument, negotiation means an indorsement completed by deliver (Sec 191)

2. The indorsement must be written on the instrument itself or upon paper attached thereto (allonge) (Sec 31)

3. The indorsement must be an indorsement of the entire instrument. Except when the instrument has been paid in part, it may indorsed as to the residue.

4. 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.

5. 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 to indorse for the others.

INDORSEMENT

6. 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.

7. 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.

8. Where any person is under obligation to indorse in a representative capacity, he may indorse in such terms as to negative personal liability.

9. 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 was overdue

KINDS OF INDORSEMENT

1. Special 2. Blank 3. Qualified 4. Conditional 5. Restrictive 6. Joint 7. Successive 8. Irregular

SPECIAL INDORSEMENT

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.

BLANK INDORSEMENT

An indorsement in blank specifies no indorsee, and an instrument so indorsed is payable to bearer, and may be negotiated by delivery. 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.

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 indorser's signature the words "without recourse" or any words of similar import. Such an indorsement does not impair the negotiable character of the instrument. A qualified indorser is subject to the same warranties as that of a person who negotiates by mere delivery.

QUESTION

X issued a promissory note payable to Z or order for P10,000. Z negotiated the note to A. A indorsed the note to B, which reads “Pay to B without recourse”. Which of the following is true? A. B can no longer negotiate the note further B. If B negotiates the note to C, C can hold Z, A and B liable

since he can trace his title through their indorsements C. A is still liable on the note in case of breach of warranty of a

qualified indorser D. B is treated as a mere assignee

QUESTION

X issued a promissory note payable to Z or order for P10,000. Z negotiated the note to A. A indorsed the note to B, which reads “Pay to B without recourse”. Which of the following is true? A. B can no longer negotiate the note further B. If B negotiates the note to C, C can hold Z, A and B liable

since he can trace his title through their indorsements C. A is still liable on the note in case of breach of

warranty of a qualified indorser D. B is treated as a mere assignee

CONDITIONAL INDORSEMENT

Where an indorsement is conditional, the party required to pay the instrument may disregard the condition and make payment to the indorsee or his transferee whether the condition has been fulfilled or not. 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.

QUESTION

M made a promissory note in favor of P for P10,000. P negotiated the note to A and A negotiated the note to B by writing at the back of the note: “Pay to C in case he passes the board exam”, in this case: A. M is constrained to wait until the condition is fulfilled since

that is the order of A B. The instrument is no longer negotiable because promise to

pay a sum certain in money is already conditional. C. M will pay B and the latter will be the one to deliver to C after

the condition is fulfilled D. M can pay C regardless if the condition is fulfilled or not

QUESTION

M made a promissory note in favor of P for P10,000. P negotiated the note to A and A negotiated the note to B by writing at the back of the note: “Pay to C in case he passes the board exam”, in this case: A. M is constrained to wait until the condition is fulfilled since

that is the order of A B. The instrument is no longer negotiable because promise to

pay a sum certain in money is already conditional. C. M will pay B and the latter will be the one to deliver to C after

the condition is fulfilled D. M can pay C regardless if the condition is fulfilled or

not

RESTRICTIVE INDORSEMENT

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 persons. But the mere absence of words implying power to negotiate does not make an indorsement restrictive.

RESTRICTIVE INDORSEMENT

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.

QUESTION

Which of the following is not a restrictive indorsement? A. Pay to X only B. Pay to B in trust for Z C. Pay to M for collection D. Pay to A without recourse

JOINT INDORSEMENT

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 to indorse for the others.

SUCCESSIVE INDORSEMENT

Where an instrument is negotiated back to a prior party: 1. It does not affect negotiability; 2. The instrument is not yet discharged, if the prior party is a

party secondarily liable; 3. Such party may reissue and further negotiable the same; 4. But he is not entitled to enforce payment thereof against any

intervening party to whom he was personally liable; 5. Such party may also strike-out the indorsements of the

intervening parties since they are no longer necessary for his title.

QUESTION

M issued a promissory note payable to P or order for P10,000. P negotiated the note to A, the A to B then B to P. In this case, A. The note is discharged by confusion or merger B. A and B are no longer liable to P being intervening parties C. P can no longer further negotiate the instrument D. M is not liable to P anymore since he was the payee and now

the holder

QUESTION

M issued a promissory note payable to P or order for P10,000. P negotiated the note to A, the A to B then B to P. In this case, A. The note is discharged by confusion or merger B. A and B are no longer liable to P being intervening

parties C. P can no longer further negotiate the instrument D. M is not liable to P anymore since he was the payee and now

the holder

IRREGULAR INDORSEMENT

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 the 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.

HOLDER

A Holder means the payee or indorsee of a bill or note who is in possession of it or the bearer thereof (Sec. 191), who may sue on his own name (Sec. 51).

HOLDER NOT IN DUE COURSE

Holder NOT in due course can still collect on the instrument: The Negotiable Instruments Law does not provide that a holder, who is not a holder in due course, may not in any case, recover on the instrument. If B purchases an overdue negotiable promissory note signed by A, he is not a holder in due course; but he may recover from A, if the latter has no valid excuse for refusing payment. The only disadvantage of holder who is not a holder in due course is that the negotiable instrument is subject to defense as if it were non- negotiable. (CHAN WAN VS. TAN KIM, G.R. No. L-15380; September 30, 1960)

HOLDER IN DUE COURSE

A holder in due course is a holder who has taken the instrument under the following conditions (COVN): 1. That it is complete and regular upon its face; 2. That he became the holder of it before it was overdue, and

without notice that it has 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.

QUESTION

A personal defense may be used against A. Holder in due course B. Holder for value C. Both A and B D. Neither A nor B

1. THAT THE INSTRUMENT IS COMPLETE AND REGULAR UPON ITS FACE

Complete - it is complete when it is not wanting of any material particular or particular proper to be inserted in a negotiable instrument without which the same will not be complete.

Regular – It is regular upon its face when it does not contain any material alterations or if there are, they are not apparent or visible on the face of the instrument.

A Holder upon receiving an instrument which is incomplete or irregular (containing visible and apparent alterations) must be put on inquiry why it is such. If he fails to do so, he won’t be regarded as a holder in due course.

2. HE TOOK IT BEFORE IT WAS OVERDUE OR NO NOTICE OF PREVIOUS DISHONOR

Overdue – an instrument is overdue after the date of maturity fixed therein or upon happening of an event certain, and a person taking an overdue instrument must be put on inquiry why the instrument is still in circulation

Dishonor may be by non-acceptance (bills of exchange) or by non-payment (promissory notes and bills of exchange).

A holder who has knowledge that the instrument was previously dishonored is not a holder in due course.

3. HE TOOK IT IN GOOD FAITH AND FOR VALUE

General Rule: every holder is deemed prima facie a holder a due course.

Exception: 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 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.

When inquiry should be made: If the holder acquires a negotiable instrument under circumstances which should have put him in inquiry, he should do so. Otherwise, he may not be considered in good faith for gross neglect.

HOLDER FOR VALUE

Value is any consideration sufficient to support a simple contract. An antecedent or pre-existing debt constitutes value; and is deemed such whether the instrument is payable on demand or at a future time.

Where value has at any time been given for the instrument, the holder is deemed a holder for value in respect to all parties who become such prior to that time.

Note that taking the instrument for value is only one requisite for a holder in due course. As such, all Holders in Due Course are Holders for Value; but not all Holders for Value are Holders in Due Course.

4. NO NOTICE OF ANY INFIRMITY IN THE INSTRUMENT OR DEFECT IN THE TITLE OF THE PERSON NEGOTIATING IT

To constitutes 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 amounted to bad faith.

The title of a person who negotiates an instrument is defective 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.

PAYEE AS HOLDER IN DUE COURSE

Section 191 defines "holder" as the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof. Sec. 52 defines a holder in due course as "a holder who has taken the instrument under the conditions enumerated therein. ”Since "holder", as defined in sec. 191, includes a payee who is in possession the word holder in the first clause of sec. 52 and in the second subsection may be replaced by the definition in sec. 191 so as to read "a holder in due course is a payee or indorsee who is in possession," etc. (Brannan's on Negotiable Instruments Law, 6th ed., p. 543). (VICENTE DE OCAMPO VS. ANITA GATCHALIAN)

RIGHTS OF A HOLDER IN DUE COURSE

1. He may sue in its own name; (Sec 51) 2. A holder in due course holds the instrument free from any

defect of title of prior parties, 3. Free from defenses available to prior parties among

themselves; (Sec 57) 4. May enforce payment of the instrument for the full amount

thereof against all parties liable thereon. (Sec 57) and payment to him in due course discharged the instrument. (Sec 51)

PARTIAL HOLDER IN DUE COURSE

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 therefor, he will be deemed a holder in due course only to the extent of the amount therefore paid by him.

SHELTER RULE

If a Holder is not a holder in due course, he is subject to personal defenses as between prior parties. The only exception is an ordinary holder who derived his title from a holder in due course, this is known in American case law as “Shelter Rule”.

The rule does not apply, however, to a holder who repurchased the instrument either personally or through an agent.

If the original payee of a note unenforceable for lack of consideration repurchases the instrument after transferring it to a holder in due course, the paper again becomes subject in the payee's hands to the same defenses to which it would have been subject if the paper had never passed through the hands of a holder in due course. The same is true where the instrument is retransferred to an agent of the payee. (CHARLES FOSSUM VS. FERNANDEZ HERMANOS, GR No. L-19461)

CLASSIFICATION OF PARTIES AS TO LIABILITY

Primarily Liable: 1. Maker of a promissory note; 2. Drawee-acceptor of a bill of exchange (including a certifier of

a check); A drawee is not liable on a bill unless he accepts the same. Secondarily Liable: 1. Drawer of a bill of exchange; 2. General indorsers; 3. Acceptor for honor.

ENFORCEMENT OF LIABILITY

Parties Primary Liable: presentment for payment must be made to enforce liability.

Parties Secondarily Liable: presentment for acceptance or payment must be made; the bill or note must be dishonored; a notice of dishonor is given.


Condition of Drawer for Secondary liability (Sec 61) 1. That the bill is presented for acceptance (Sec. 143) when

required or presented for payment (Sec. 70), as the case may be, to the drawer.

2. That the bill is dishonored by non acceptance (Sec. 149) or non payment (Sec 83) as the case may be.

3. That the necessary proceedings on dishonor be duly taken such as notice of dishonor is given to the drawer or in case of a foreign bills, protest is made followed by a notice of protest. (Sec 152)


Condition of General Indorser for Secondary liability (Sec 61) 1. That the instrument is presented for acceptance (Sec. 143)

when required or presented for payment (Sec. 70), as the case may be, to the drawer.

2. That the instrument is dishonored by non-acceptance (Sec. 149) or non-payment (Sec 83) as the case may be.

3. That the necessary proceedings on dishonor be duly made.

MAKER VS. DRAWER

MAKER DRAWER

Party to a Promissory note Party to a bill of exchange

Primary liable Secondary liable

Cannot limit his liability Can limit his liability

Unconditionally bound to pay the instrument

Conditionally bound to pay the instrument

MAKER VS. ACCEPTOR

MAKER ACCEPTOR

Party to a promissory note Party to a bill of exchange

Engage to pay the instrument according to its tenor

Engage to pay the instrument according to its acceptance.

No drawer to consider Admit the existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument

Admits the existence of the payee and his then capacity to indorse

same

QUALIFIED VS. GENERAL INDORSER

QUALIFIED INDORSER GENERAL INDORSER

1. That the instrument is genuine and in all respects what it purports to be;

2. That he has a good title to it; 3. That all prior parties had

capacity to contract

Same

4. That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless

4. Warrant that the instrument is, at the time of his indorsement, valid and subsisting

There is no secondary liability. There is secondary liability

DEFENSES

PERSONAL DEFENSES REAL DEFENSES

Incomplete but delivered (Sec 14) Incomplete and undelivered (Sec 15)

Complete but undelivered (Sec 16)

Indorsement by infant or corporation (available to minor or corporation only) (Sec 22)

Insertion of a wrong date (Sec 13)

Forgery (Sec 23)

Ante date or post dated (Sec 12)

Want of authority, apparent and real (Sec 23)

DEFENSES


Absence or failure of consideration (Sec 28)

Material alteration (Sec 124)

Simple fraud or fraud in inducement (Sec 55)

Prescription

Acquisition of instrument by fraud, duress, or force and fear

Fraud in factum or fraud in esse contractus

Acquisition of instrument by unlawful means

Acquisition of instrument for an illegal consideration

DEFENSES


By negotiation of the instrument in breach of faith

By negotiation under circumstances that amount to fraud

INCOMPLETE BUT DELIVERED INSTRUMENT

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. (Sec 14)

INCOMPLETE AND UNDELIVERED

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. (Sec. 15)

COMPLETE BUT UNDELIVERED

Complete but undelivered - 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. (Sec. 16)

QUESTION

A delivers to B a promissory note payable to the order of B without specifying the amount but A authorized B to place the amount of PhP5,000 in the promissory note, which was signed by A. B, in violation of the instruction of A, placed PhP50,000 as the amount payable. Later, B indorsed the note to C. The holder C A. Can recover from either A or B. B. Cannot recover from either A or B if they know the defect. C. Cannot recover from A but can recover from B. D. Cannot recover from B since he does not know of the defect

QUESTION

A issued a negotiable promissory note to B with the amount in blank, but with authority given to B to fill up the blank for PhP100,000. B filled it up for P400,000 and negotiated it to C. If C is a holder in due course, how much can he collect from either A or B?

A B

A. P100,000 P400,000

B. P100,000 P100,000

C. P400,000 P400,000

D. P400,000 P100,000

QUESTION

Assuming in the preceding number that B filled it up in accordance with the authority given, i.e., P100,000, and negotiated it to C, who changed the amount to P400,000 and later on negotiated the instrument to H who took it in good faith and for value, how much can C collect? A. P400,000 if he is a holder in due course B. P100,000 if he is a holder in due course C. P400,000 whether he is a holder in due course or not D. P100,000 whether he is a holder in due course or not

PRESENTMENT FOR PAYMENT

General Rule: Presentment for payment is not necessary to charge the person primarily liable but it is necessary to charge the Drawer and Indorser.

Exceptions: 1. Drawer - The drawer has no right to expect or require that

the drawee or acceptor will pay the instrument. (Sec 79) 2. Indorser The instrument was made or accepted for indorser

accomodation and he has no reason to expect that the instrument will be paid if presented. (Sec 80)

3. When presentment is dispensed with (Sec 82) a. Presentment cannot be made after exercise of reasonable

diligence b. Drawee is a fictitious person c. Waiver f presentment, express or implied

4. When the bill is dishonored by non acceptance (Sec 151

SUFFICIENT PRESENTMENT

How: 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. (Sec 74)

By whom: Holder or person authorized to received payment on his behalf.

To whom: Person primarily liable or in his absence, any person found at the place where presentment is made. Exception: When no place of payment is specified: 1. When principal debtor is dead (Sec. 76) - Personal

representative if there be, and if, with the exercise of reasonable diligence he can be found.

2. Persons liable as Partners (Sec 77) - Any partner 3. Joint Debtor (Sec 78) - Each of them


When: 1. Not payable on demand (Sec 71) - On the day it falls due 2. Payable on demand

a. Promissory note - Reasonable time after its issue b. Bill of exchange - Reasonable time after the last negotiation

3. Payable at bank (Sec 75) a. Has fund - during banking hours b. No funds to meet it - at any time during the day, any hour

before the bank is closed. Time of Maturity 1. Time fixed without grace 2. If it falls on a Sunday or Holiday, the next business day 3. If it falls on a Saturday:

a. Payable on demand – 12:00nn if Saturday is not a holiday; b. Not payable on demand – next business day


Where: 1. Place of payment specified - Place specified (Sec 73) 2. Place not specified but the address of the person to make is

given - Address indicated in the instrument; 3. Place of payment and address not given - Usual place of

business or residence of the person to make payment. 4. Other cases - Where the person to make payment he can be

found or if presented at his last known place of business or residence

NOTICE OF DISHONOR

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.

Who should give: the holder or any party who may be compelled to pay (like indorsers) or their authorized representative.

Effect of Notice: immediate recourse against the indorsers arise. It is as if the indorsers become primarily liable in the payment in the sense that the holder need not claim payment from the person primarily liable.

Waiver: Notice of dishonor may be waived either before the time of giving notice has arrived or after the omission to give due notice, and the waiver may be expressed or implied.

NOTICE OF DISHONOR

Who will benefit (those no longer required to give notice) 1. Given by or on behalf of the holder – to the benefit of all

subsequent holders (if negotiated after dishonor) and all prior parties (to the holder) who have a right of recourse against the party to whom it is given.

Example: M to P to A to B to C to H. If H gives notice to P, it inures to the benefit of A, B and C, such that they need not provide notice to P also.

2. Given by the indorser who may be compelled to pay – inures

to the benefit of the holder and parties subsequent to the party to whom notice is given.

Example: M to P to A to B to C to H. If notice is given by B to A, it inures to the benefit of C and H as well.

NOTICE OF DISHONOR

Time of giving notice: 1. Parties reside in the same place:

a. Business place – before close of business hours on the day following

b. Residence – before usual hours of rest on the day following c. Sent by mail – deposited in the post office in time t reach him

in the usual course on the day following 2. Parties reside in different places

a. Sent by mail – i. deposited in the post office in time to go by mail the day

following the day of dishonor ii. if there is no mail at a convenient hour on the last day,

by the next mail thereafter b. Otherwise – within the time that notice would have been

received in due course of mail if it would have been deposited in the post office.

NOTICE OF DISHONOR

When not required as to DRAWER: 1. When the drawer and the drawee are the same person 2. When 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 4. Where the drawer has no right to expect or require that the

drawee or acceptor will honor the instrument 5. Where the drawer has countermanded payment (e.g., when a

stop payment order is issued)

NOTICE OF DISHONOR

1. When the drawee is a fictitious person or person not having capacity to contract, and the indorser was aware of that 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 is made or accepted for his accommodation (he is ultimately the one liable on the instrument)

DISCHARGE OF NEGOTIABLE INSTRUMENTS

Discharge of instrument - a release of all parties, whether primary or secondary, from the obligations arising thereunder. It renders the instrument without force and effect and, consequently, it can no longer be negotiated. It may be effected: 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 his accommodation;

3. By the 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.

PAYMENT BY PARTY SECONDARILY LIABLE

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 regard all prior parties, and he may strike out his own and all subsequent indorsements and against negotiate the instrument, except: 1. Where it is payable to the order of a third person and has

been paid by the drawer; and 2. Where it was made or accepted for accommodation and has

been paid by the party accommodated

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 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

INTENTIONAL CANCELLATION

Intentional Cancellation by the Holder discharges the instrument. However, 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 on the party who alleges that the cancellation was made unintentionally or under a mistake or without authority.

DISCHARGE OF PARTIES SECONDARILY LIABLE

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 or payment made by a prior party; 5. By a release of the principal debtor unless the holder's 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 holder's right to enforce the instrument unless made with the assent of the party secondarily liable or unless the right of recourse against such party is expressly reserved.

MATERIAL ALTERATION

What constitutes a material alteration. – A material alteration is 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 or the relations of the parties; 5. The medium or currency in which payment is to be made; 6. Or which adds a place of payment where no place of payment

is specified, or 7. Any other change or addition which alters the effect of the

instrument in any respect.

MATERIAL ALTERATION

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

QUESTION

A issued a negotiable promissory note to B with the amount in blank, but with authority given to B to fill up the blank for PhP100,000. B filled it up for P400,000 and negotiated it to C. If C is a holder in due course, how much can he collect from either A or B?

A B

A. P100,000 P400,000

B. P100,000 P100,000

C. P400,000 P400,000

D. P400,000 P100,000

QUESTION

Assuming in the preceding number that B filled it up in accordance with the authority given, i.e., P100,000, and negotiated it to C, who changed the amount to P400,000 and later on negotiated the instrument to H who took it in good faith and for value, how much can C collect? A. P400,000 if he is a holder in due course B. P100,000 if he is a holder in due course C. P400,000 whether he is a holder in due course or not D. P100,000 whether he is a holder in due course or not

PRESENTMENT FOR ACCEPTANCE

Presentment for Acceptance, when required: 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.


The holder of a bill which is required to present it 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.

Exceptions: 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 by bill. 2. Where, after the exercise of reasonable diligence,

presentment can not be made. 3. Where, although presentment has been irregular, acceptance

has been refused on some other ground.


1. Presentment for acceptance must 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;

2. 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;

3. Where the drawee is dead, presentment may be made to his personal representative;

4. 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.


5. 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.

6. 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 nonacceptance or he loses the right of recourse against the drawer and indorsers

7. When a bill is dishonored by nonacceptance, an immediate right of recourse against the drawer and indorsers accrues to the holder and no presentment for payment is necessary.

ACCEPTANCE

ACCEPTANCE is the signification of the drawee of his assent to the order of the drawer.

Requisites: 1. It must be in writing 2. Signed by the drawee 3. Drawee must assent to the promise to pay a sum certain in

money and not by any other means. Where: 1. The instrument itself or 2. In a separate piece of paper.

But under Sec. 133, the holder may require the acceptance to be on the bill, and if such request is refused, the bill may be treated as dishonored.

ACCEPTANCE

When deemed accepted: 1. When the bill is delivered to the drawee and he destroys the

bill 2. The bill is delivered to the drawee but the drawee refuses

within 24 hours or within such period as the holder may allow to return the bill accepted or non-accepted. (137)

Future bills (135): an acceptance issued before a bill is drawn is deemed an actual acceptance in favor of every person who, upon the faith thereof, receives the bill for value.

ACCEPTANCE

Kinds of Acceptance: 1. Conditional – payment by the acceptor is dependent on the

fulfillment of the condition. 2. Partial – acceptance to pay a part only of the amount for

which the bill is drawn 3. Local – acceptance to pay at a particular place. 4. Qualified as to time 5. Acceptance of some, on or more of the drawees but not of all

ACCEPTANCE

Unqualified acceptance: the holder may refuse to take a 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 a drawer or indorsee receives notice of a qualified acceptance he must, within a reasonable time, express his dissent thereto or he will be deemed to have assented thereto.

PROTEST

PROTEST is a formal declaration, drawn and signed by a notary, that the foreign bill has been presented for acceptance or payment and that the acceptance or payment is refused.

When Necessary: 1. In case of a foreign bill dishonored by non-acceptance or non-

payment 2. If a stranger to a bill will accept the instrument for honor 3. If the bill will be presented for payment to acceptor for honor

or referee in case of need; and 4. When the bill is dishonored by the acceptor for honor

ACCEPTANCE FOR HONOR

Acceptance for Honor: 1. is an undertaking by a stranger to a bill 2. after protest 3. for the benefit of:

a. any party liable thereon or b. for the honor of the person for whose account the bill was

drawn 4. which acceptance inures also the benefit of all parties

subsequent the person for whose honor it is accepted and 5. conditioned to pay the bill when it becomes due if the original

drawee does not pay it.

Where an acceptance for honor does not expressly state for whose honor it is made, it is deemed to be an acceptance for the honor of the drawer.

ACCEPTANCE FOR HONOR

Liability of Acceptor for Honor: The acceptor for honor, by such acceptance, engages that he will, on due presentment, pay the bill according to the terms of his acceptance provided it shall not have been paid by the drawee and provided also that is shall have been duly presented for payment and protested for non-payment and notice of dishonor given to him.

The acceptor for honor is liable to the holder and to all parties to the bill subsequent to the party for whose honor he has accepted.

CHECKS

A check is a bill of exchange drawn on a bank payable on demand. 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. (Sec 186) Where a check is certified by the bank on which it is drawn, the certification is equivalent to an acceptance. Where the holder of a check procures it to be accepted or certified, the drawer and all indorsers are discharged from liability thereon. (Sec 188) 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.

EFFECT OF CROSSING A CHECK

1. The check may not be encashed but only deposited in the bank;

2. The check may be negotiated only once to one who has an account with a bank; and

3. The act of crossing the check serves as a warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose, otherwise he is not a holder in due course. (STATE INVESTMENT HOUSE INC. VS. IAC)

Issuing a crossed check imposes no obligation on the drawee not honor such a check. It is more of a warning to the holder that the check cannot be presented to the drawee bank for payment in cash. (GEMPESAW VS. CA)

ANTI-BOUNCING CHECKS LAW

BP Blg 22 was enacted to prevent the proliferation of worthless checks in the mainstream of daily business and to avert not only the undermining of the banking system of the country but also the infliction of damage and injury upon trade and commerce occasioned by the indiscriminate issuances of such checks.

ELEMENTS: 1. The making, drawing and issuance of any check to apply for

account or for value; 2. The knowledge of the maker, drawer, or issuer that at the time of

issue he does not have sufficient funds in or credit with the drawee bank for the payment of such check in full upon its presentment; and

3. The subsequent dishonor of the check by the drawee bank for insufficiency of funds or credit or dishonor for the same reason had not the drawer, without any valid cause, ordered the bank to stop payment.


KNOWLEDGE OF INSUFFICIENT FUNDS: The making, drawing and issuance of a check payment of which is refused by the drawee because of insufficient funds in or credit with such bank, when presented within ninety (90) days from the date of the check, shall be prima facie evidence of knowledge of such insufficiency of funds or credit unless such maker or drawer pays the holder thereof the amount due thereon, or makes arrangements for payment in full by the drawee of such check within (5) banking days after receiving notice that such check has not been paid by the drawee.


Prescriptive period of BP 22 Violation of B.P. Blg. 22 prescribes in four (4) years from the commission of the offense or, if the same be not known at the time, from the discovery. thereof

ESTAFA

Any person who shall defraud another 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 from the bank and/or 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.

ESTAFA

ESSENTIAL ELEMENTS: 1. That the offender postdated or issued a check in payment of

an obligation contracted at the time the check was issued; 2. That such postdating or issuing a check was done when the

offender had no funds in the bank, or his funds deposited therein were not sufficient to cover the amount of the check;

3. Deceit or damage to the payee thereof.

QUESTION

X drew a check dated Jan. 1, 2018 which he issued in favor of A as payment for previously rendered services. A then negotiated the check to B for the purchase of goods, which B immediately delivered. On April 3, 2018, B went to the drawee bank to have the check encashed but the same was dishonored for insufficiency of funds. A notified X and B of the dishonor on the same day. Assuming X was not able to make payment within the prescribed period from notice, X can be held liable for:

Anti-Bouncing Checks Estafa

A Yes Yes

B No No

C Yes No

D No Yes

QUESTION

Assuming A was not able to make payment within the prescribed period from notice, A can be held liable for:

Anti-Bouncing Checks Estafa

A Yes Yes

B No No

C Yes No

D No Yes

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