Negotiable Instrument Law Philippines

8/12/2019 Negotiable Instrument Law Philippines

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ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)

ACT NO. 2031

February 03, 1911

THE NEGOTIABLE INSTRUMENTS LAW

I. FORM AND INTERPRETATION

Section 1. Form of negotiable instruments. -An instrument

to be negotiable must conform to the following

requirements:

(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; and

(e) Where the instrument is addressed to a drawee,

he must be named or otherwise indicated therein

with reasonable certainty.

What are the requisites for a negotiable note?

A Promissory note, to be negotiable , must conform to the

following requirements:

1. it must be in writing and signed by the maker;2. Must contain an unconditional promise to pay a sum

certain in money

3. must be payable on demand or at a fixed ordeterminable future time

4. must be payable to order or bearerWhat are the requisites of a negotiable bill?

A bill of exchange, to be negotiable, must conform to the

following requirements:

1. in writing and signed by the drawer2. contain an unconditional; order to pay a sum certain

in money

3. payable on demand or at a fixed or determinablefuture time

4. payable to order or bearer5. the drawee must be named or otherwise indicated

therein with reasonable certainty

What is meant by in writing and signed by the maker or

drawer?

The instrument must in writing for if it were not

there would be nothing to be negotiated or passed from hand

to hand. The medium in which it is written and where it is

written is not important. It may be in ink, print or pencil. It

may be in parchment, cloth, leather or any other substitute of

paper. What is important is it is in writing and such writing is

capable of being transferred or negotiated. (e.g. A note

written on a blackboard is not negotiable). In signing, the

maker thereby binds himself to be liable for the note (Sec. 18

It may be the makers full name or his surname only or

signature. It may be in initials or numbers. But , where the

name is not signed, the holder must prove that what is

written is intended as the signature of the person sought to

be charged. In fact, for as long as it be shown that such was

adopted and used by the maker as his signature, it is

sufficient. (Note: he who makes it possible for the

commission of fraud, bears the loss).

What is meant by an unconditional promise/order to pay a

sum certain in money?

The promise to pay must be on the note itself although it

is not necessary to use the word promise. It is enough that

1. equivalent words be used such as agree, wilpay, shall pay; or that

2. words implying a promise are contained in theinstrument such as Good to or payable on

demand (e.g. Good to X or order P10.)

Mere acknowledgement of a debt is not enough but an

acknowledgment followed by the phrase to be paid implies

a promise to pay. ( I acknowledge a debt of P10 to be paid on

demand) Further, an instrument which stated Due X or

order on demand P10 is negotiable because to be paid

though not stated, is required by the sense of the statement.

Similarly, it is not necessary that the word order be used

Equivalent words or those which show the drawer will that

the money should be paid are sufficient. All that must be

remembered is that the BOE is more than mere asking of a

favor and that it is an instrument demanding a right. Thus, a

mere requests to pay or mere authorization to ay is not

enough to render it negotiable for it gives a discretion

whether or not to pay. To be unconditional or absolute, the

order or promise to pay must not be subject to a condition

a contingent event). If the event is certain to happen, it is not

contingent nor is it a condition. Under Art. 1179 of the NCC, a

condition is a (1) future and uncertain event; or (2) a past

event unknown to the parties (See also Sec. 3 for further

meaning).

The amount of money to be paid must be

determinable (at the time of issue) by inspection and mus

be stated plainly on the face of the instrument. The sum is

certain even is mathematical computation is still neededbecause the amount to be paid is still ascertainable from the

instrument alone without reference to any outside source

(see also Sec. 2). The payment must be for a sum of money .

To be negotiable, the bill or note must not be payable in

goods, wares, property or service nor in bonds, stocks, checks

or foreign bills. The reason for the requirement is that money

is the one standard of value in actual business. Exception to

this rule is Sec. 5d. an instrument payable in money or goods,

services et. at the option of the holder. Further, while R.A

529 requires that the discharge of obligations be in lega

tender of the Philippines the instruments negotiability and


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validity are not affected by the fact that another currency is

stipulated (Sec. 6e) In such case, the indemnity to be allowed

should be expressed in Phil. Currency on the basis of the

current rate of exchange at the time of payment. But, to be

negotiable, the instrument must state the denomination in

which it is to be payable.

When is an instrument payable on demand?

In accordance with Sec. 7, a note is payable on demand:

1. When it is so expressed to be payable on demand orat sight or on presentation;

2. when no time for payment is expressed;3. when an instrument is issued, accepted or indorsed

when overdue- as to the party so issuing, accepting

or indorsing, it is payable on demand.

When is an instrument payable at a fixed or determinable

future time?

It is payable at a fixed time when a date is specified.But where the date is given as Dec. 2, it is not fixed because

the time of payment is not determinable as the year is not

given.

In accordance with Sec. 4, an instrument is payable at a

determinable future time when it is expressed to be payable-

1. at a fixed period after date or sight; or2. on or before a fixed or determinable future time

specified therein; or

3. on or at a fixed period after the occurrence of aspecified event which is certain to happen though

the time of happening be uncertain.

When is an instrument payable to order? To bearer?

In accordance with Sec. 9b, an instrument is payable to

bearer when

1. it is expressed to be so payable;2. it is payable to a specified person or bearer;3. it is payable to the order of a fictitious or non-

existing person and this fact is known to the maker

or drawer;

4. when the name of the payee does not purport to bethe name of any person;

5. when the only or last indorsement is an indorsementin blankIt is not important that the words order or bearer be

used. It is sufficient that words of similar import are put

in its place. (e.g. Pay to B or assigns or assignees or

holder or possessor). A note payable to the order or

bearer is payable to order and such instrument may be

negotiated only by bearers indorsement. (The bearer is

the payee.)

When is the indication of the drawees name sufficient?

It is sufficient that the name of the person on whom

a bill is drawn should appear on the face of the

instrument. Otherwise, the instrument would not be

negotiable. But, under Sec. 14, the drawees name may

be omitted and be filled in under implied authority like

any other blank. (REMEMBER: Sec. 14 refers to the

incomplete but delivered instruments and that the

authority to fill up should be in strict accordance with

the authority given). Also, an acceptance by the drawee

may supply the omission of a designation and renders

said instrument negotiable.

Sec. 2. What constitutes certainty as to sum. - The sum

payable is a sum certain within the meaning of this Act

although it is to be paid:

1. with interest; or2. by stated installments; or(c) by stated installments, with a provision that

upon default in payment of any installment or o

interest, the whole shall become due; or

(d) with exchange, whether at a fixed rate or at thecurrent rate; o

(e) with costs of collection or an attorney's fee, in

case payment shall not be made at maturity.

What is the rule regarding the sum payable being definite

and certain?

Since a NI is a device intended to take the place of

money, it is therefore essential that it represents a fixed

amount of money. The amount of money must be

determinable by inspection and must be stated plainly on the

face/ body of the instrument.

When can it be said that the sum is certain despite the

stipulation of interest?

A stipulation of interest does not render the sum to

be paid as uncertain because given the interest rate, the

amount due can be easily computed. Provided the principa

sum is certain, the amount due becomes a matter o

mathematical computation ascertainable from the face o

the instrument alone. Further, where interest is stipulated

but not specified (as to rate), the note is still negotiable and

the rate is to be understood to be the legal rate which is 12%

for loans or forbearance of money.

What is an escalation clause? A de-escalation clause?

An escalation clause is a stipulation in an agreement

pertaining to a loan or forbearance of money, goods or

credits providing that the rate of interest agreed upon may be

increased in the event that the applicable maximum rate of

interest, is increased by law or by the Monetary Board. De-

escalation clause is stipulation in the agreement that the rate

of interest agreed upon shall be reduced if the maximum rate


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of interest is decreased by law or by the Monetary Board. The

escalation clause is valid if there is also a de-escalation clause

in the agreement.

What are the requirements as regards payment of

installments?

1. The amount of installment must be stated (the sum payable for each installment mustnot be uncertain. It can be ascertainable.)

2. The maturity date of each installment mustbe fixed or determinable.

What is the rule on acceleration clause?

An instrument, which is to be paid in, stated installment is not

rendered non-negotiable despite a provision that upon

default of any installment or of interest, the whole amount

shall become due. Such is called an acceleration clause

because it hastens the payment of the whole note. The failure

to pay any installment renders the balance of the amount

immediately due and demandable. An acceleration clause

does not make the instrument payable upon a contingency

(thus, non-negotiable) since payment is surely to be made

and its time of payment is surely come. In a sense, it is

deemed to be payable on or before a fixed or determinable

future time specified therein (sec.4b)

What is the rule on provisions for exchange?

Exchange is defined to be the difference in value of the same

amount of money in different countries. The exchange may

be at the (1) current rate, or at a (2) fixed rate indicated

therein. Such provision does not render the instrument non-negotiable because while the rate of exchange is not always

the same and while it is technically true that resort must be

had to extrinsic evidence to ascertain what it is, yet the

current rate of exchange between 2 places at a particular

date is a matter of common commercial knowledge, or at

least easily ascertained by any one so that the parties can

always, without difficulty, ascertain the exact amount

necessary to discharge the paper. It must be remembered

that this provision applies only to instruments drawn in one

country and payable in another. Where an instrument is

drawn in one country and payable in the same country, there

can be no exchange, so a provision for payment of exchange

may be disregarded.

Why doesnt a stipulation for attorneys fees render the sum

uncertain?

Although such a stipulation will make the sum payable after

maturity uncertain, it will not affect the certainty of the sum

payable at maturity and, therefore will not affect the

negotiability of the instrument in which it is stipulated. The

purpose of the stipulation is not to give the lender a larger

compensation for the loan than the law allows, but to

safeguard the lender against future loss or damage by being

compelled to retain counsel to institute judicial proceedings

to collect his debt. The provision refers only to reasonable

attorneys fees.

What is the effect of negotiable after the note is overdue?

After the date of maturity, the instrument will no longer be

negotiable in the full commercial sense, that is, in the sense

that any transferee acquiring it would not be a holder in due

course, as he acquire the instrument after it is overdue. Since

the transferee would not be a holder in due course (HIDC), he

would hold the instrument subject to the defenses as if it

were non-negotiable.

Sec. 3. When promise is unconditional. - An unqualified

order or promise to pay is unconditional within the meaning

of this Act 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.

What are the difference between par A. and the last par. of

sec 3.?

In the first case, the particular fund indicated is not the direct

source of payment. It is only the source of reimbursement

The payment of the instrument is not made subject to the

condition of availability or sufficiency of funds in the said

account. Here, the drawee first pays the payee from his own

funds, then, afterwards, the drawee pays himself from the

funds indicated. The order or promise to pay is upon the

general credit of the drawer or the maker. In the second case

the particular fund indicated is the direct source of payment

Here, there is only one act, which is that the drawee pays

directly from the fund indicated. The payment is, thussubject to the condition that the funds indicated are

sufficient. But the funds indicated may or may not be

sufficient so that the instrument is rendered non-negotiable

because payment is conditional.

Eg. 1st

case- pays to B or order P10 and reimburses yourself

out of the money in your hands.

2nd

case- pays to B or order P10 out of my part of the

estate.


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But, where the sum payable is to be paid out of a particular

fund yet payment is not restricted to such fund alone,

negotiability is not destroyed. Eg. Pay to B or order P10 out of

the monthly rental due from A and secured to be paid by my

BPI account. Similarly, where the instrument indicates a

particular account to be debited with the amount, the

instrument remains unconditional and negotiable. The

instrument, in this case, is to be first paid and afterwards, the

particular account will be debited. The payment is not subject

to the sufficiency of account to be debited. Eg. Pay to B or

order P10 and charge the same to my account.

What is a statement of transaction?

Instruments are not issued without any transaction

upon which they are based. The statement of transaction is

the reason giving rise to the issuance of the instrument and

the mere fact that it. Is stated in the instrument will not make

the promise or order conditional. Eg. Pay to B or order P10 for

payment of a debt.

But where the promise or order is made subject to

the terms and conditions of the transaction stated, then the

instrument is rendered non-negotiable. Besides would be

contrary to the rule that the negotiability of an instrument

(whether there is an un-conditional order or promise) must

be determined only from the document itself and not

elsewhere. Eg. I promise to pay B or order P10 subject to the

terms contained in the contract between A & C. Normally, an

instruments negotiability is not affected by the fact that it is

secured by a mortgage. But, where such provision become in

the note will render the amount uncertain or where such

provisions become part of the note, even though they are notin the note itself, the instrument is rendered non-negotiable.

Thus, where the note is not only secured by a mortgage but

also made subject to its provisions, the note is non-

negotiable.

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:

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.

What does at a fixed period after sight mean?

After sight means after the drawee has seen the instrument

upon presentments doe acceptance. The instrument becomes

payable after a fixed period subsequent to date of

presentment to the drawee.

What is the rule on the occurrence of a specified events?

It is essential that the specified event must be certain to

happen although the time of happening is uncertain. If the

event specified is not certain to happen, then it is a condition

and the instrument would be rendered non-negotiable, it is

payable upon a contingency and, according to the law, the

happening of the contingency or condition does not cure the

defect.

When an instrument states, I promise to pay X or order

P1000, 10 days after Ys death. Sgd.z. is this instrument

negotiable and why?

The instrument is negotiable because payment is still certain

to be made (unconditionally), i.e. Ys death will surely

happen.

But if in the previous example, Z promises to pay 10 days

before the death of Y, would such instrument be negotiable?

No, because the maturity is uncertain (as no one can telexactly when another person will die). Further, when Y is

already dead, the instrument will already be over due and wil

not be negotiable in its full commercial sense.

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:

authorizes the sale of collateral securities incase the instrument be not paid at maturity; or

(b) authorizes a confession of judgment if the

instrument be not paid at maturity; or

(c) waives the benefit of any law intended for the

advantage or protection of the obligor; or

(d) gives the holder an election to require

something to be done in lieu of payment of money.


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But nothing in this section shall validate any

provision or stipulation otherwise illegal.

What is the general rule as regards the requirement of

additional acts contained in an instrument?

The general rule is that an instrument must not contain an

order or promise to do any act in addition to payment ofmoney. Otherwise the instrument would be rendered non-

negotiable. But the rest of negotiability is whether or not the

promise to do any additional act would give rise to a cause of

action for breach of contract if the said act is not done, if it

does, the instrument is rendered non-negotiable. Eg. I

promise to pay X or order P1000 and 1 horse. Such is non-

negotiable because it contains an additional act to be

performed aside from payment of money. Eg. . I promise to

pay X or order P1000 and a horse. Such is also non-negotiable

because the choice to pay money or deliver the horse is at

the option of the debtor. But, if the phrase at the option of

X is added to the instrument, such is negotiable because the

option lies with the holder rendering the sum payable still

certain.

What are the exceptions to the general rule?

The negotiable character of an instrument otherwise

negotiable is not affected by a provision which-

1. Authorizes the sale of collateral securities in case offailure to pay- the additional act to be performed is

to be executed after the date of maturity. Before the

date of maturity, no additional act is to beperformed except the payment of money. Eg. I

promise to pay X or order P100 on the December

31,1950 provided that if I fail to do so, X may sell the

rin I delivered to secure payment of the note. Sgd. A.

2. Authorizes a confession of judgment if theinstrument be not paid- the additional act is to be

performed after the date of maturity when the

instrument ceases to be negotiable in its full

commercial sense. A power of attorney to confess

judgment anytime before maturity renders a note

non-negotiable. Further, in the Philippines,confessions of judgment have been declared void as

against public policy because

a. They enlarge the field for fraud. 2.Promissor bargains away his day in court

and the effect of the instrument is to strike

down the right of appeal accorded by the

statute. But while the provision as to

confession of judgment is not rendered

valid (because it is illegal) by virtue of the

last par. of sec.5, the instrument is never

the less negotiable.

(c). Waives the benefit of any law intended for the

advantage or protection of the

obligator- such as the rights to (1) presentment for

payment (sec.70); (2) notice of honor (sec.110); (3

protest (sec.111). These being rights, they may be waived

unless the waiver be contrary to law, public policy, etc

(art.6 of NCC.)

(d) Gives the holder an election to require something

other than money- even if there is an additional act, the

instrument still remains negotiable provided that the

right to choose is in the hands of the holder.

Sec. 6. Omissions; seal; particular money. -The validity and

negotiable character of an instrument are not affected by

the fact that:

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.

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.

What is the rule on payment in other currencies (par. e)?

Even if the money in which the instrument is to be

payable is not legal tender, provided is current money or

foreign money which has a fixed value in relation to the

money of the country in which the instrument is payable, the

negotiability of the instrument is not affected, as it is stil

considered payable in money.

Sec. 7. 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; o

(b) In which no time for payment is expressed.


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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.

Give example of the above.

Ex. 1) of when it is expressed to be payable on demand

I promise to pay on demand P 1,000 to X or bearer.

Sgd. A.

-- Instead of on demand the words on sight or on

presentation may be used. The words at sight are not

ordinarily used in promissory notes.

2) Of when no time for payment is expressed

Pay to X or order P1, 000 to Y. sgd. Z.

-- Where the instrument contains a blank space for the

date but no date is indicated, it has been held to be payable

on demand. However, it may be properly considered as an

incomplete instrument and may fall under the provisions if

sec.14 or 15 depending upon how it was delivered (or not).

3. Of the last par.a. as regards the person so issuing

A note dated July 30, 1984 and payable 30

days after date is issued on August 4,1984.

b. as regards the person so acceptingA bill payable on August 20,1984 is

accepted by the drawee on August 21,1984.

c. as regards the indorserA note payable 30 days after August 1,

1984 is indorsed on September 2,1984.

--After the date of maturity, the instrument can no longer

be negotiated as to make the partios who acquire the

instrument after the date of maturity holders in sue course

because they become holders thereof with notice that it is

already overdue, as it can be determined from the face of theinstrument itself. It is payable in demand only as between the

immediate parties.

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:

(a) A payee who is not maker, drawer, ordrawee; 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

What does payable to order mean?

In BOE, it means that the drawee orders the drawee

to pay the payee indicated or if not him, to anybody

designated by him. Such designation is made by indorsement

of the payee. In PN, the maker promises to pay the payee

indicated or if not him, to anybody designated by him

through (also) indorsement. It does not mean that a bill is

necessarily payable to order because it contains an

unconditional order to pay. A BOE may either be payable to

order or to bearer. Similarly, a PN may also be payable toorder or bearer.

What is the rule on naming the payee?

The law requires that the payee must be named or

otherwise indicated with reasonable certainty. The payee o

an instrument payable to order must be a person in being

natural or legal, and ascertained at the time of issue. If there

is no payee indicated, no one could indorse the instrument

Consequently, it is useless to consider it as negotiable.

NOTES: 1) Where the instrument is payable to the order o

the drawer and it is acceptable by the drawee, the instrument

is equivalent to a promissory note by the acceptor in favor if

the drawer.

2) Being joint payees is indicated by the

conjunction and.

Eg. I promise to pay A and B or order P100

sgd. X.

3) Being solidary payees is indicated by the

conjunction or.

Eg. I promise to pay to the order of A or B

P100. sgd. X.

4) Example of par. f Pay to the order o

Cashier of U.P. P10.

Is the following instrument payable to order: Pay to the

order of Ms. Laya P100. sgd. Coach.?


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Yes, because the instrument is payable to the order of a

specified person or to him or his order.

When can an instrument originally payable to order become

one payable to bearer?

Under sec.98, when the only or last indorsement is an

indorsement in blank.

What is the rule re: the conversion of order noted to bearer

notes?

The rule is once a bearer instrument, always a bearer

instrument. This rule refers to instruments originally payable

to bearer. But an order instrument may be converted to a

bearer instrument by blank endorsement of the payee or last

endorsee. It may again be converted to an order instrument,

by virtue of sec. 35, by writing over the signature in blank anycontract not inconsistent with the character of the

endorsement.

Sec. 9. 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 ornon-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.

What is the rule re: fictitious or non-existing persons?

This provision has 2 requisites: (1) the payee named

must be fictitious or non-existent; and (2) the one making the

instrument so payable must know him to be fictitious or non-

existing. The first requisite must be qualified. The words

fictitious person are not limited to persons having no real

existence. An existing person may be considered a fictitious

payee, depending upon the intention of the one making or

drawing the instrument. Fictitious person means never

intended who has no right to the instrument because the

drawer or maker never intended for it to be payable to the

said person. The want of interest in the payee is not the

controlling consideration in determining whether an

instrument is payable to bearer, as payable to a fictitious

person. Rather, it is the intention the maker or drawer not to

make said person the payee. Thus, it does not matter

whether the name of the payee used by the drawer or maker

be that of one living or dead or one who never existed. The

name is fictitious when it is feigned or pretended and a non

existent person is one who does not exist in the sense that he

was not intended to be payee by the drawer. Thus, an

instrument made payable to the order of non-existing person

or of a person having no interest in the transaction where the

makers believes that such person exist and has an interest in

the transaction and intends that he shall receive the same, is

not payable to a fictitious person or to bearer. Only if such

maker, knowing the person to be non-existing, neve

intended it to be paid to the designated person, can the

instrument be payable to a fictitious person or to a bearer.

NOTES: 1) Under the NIL, a check drawn payable to the orderof cash is a check payable to bearer.,and the bank may pay

it to the person presenting it for payment without the

drawers endorsement.

2) In sec.9e, the instrument contemplated is

one originally payable to order. It becomes payable

to bearer where: (a) there is only one endorsement

and such is in blank: or (b) there are severa

endorsement but the last one is in blank. But, a

blank endorsement cannot make a non-negotiable

instrument (because payable to a specified person

negotiable. The word indorsement refers only to

negotiable instruments.

Sec. 10. Terms, when sufficient. - The instrument need not

follow the language of this Act, but any terms are sufficient

which clearly indicate an intention to conform to the

requirements hereof.

NOTES:It is advisable to use the words of the law in order to

avoid uncertainty. However, under Sec. 10, it is not necessary

to use the exact words of the law. The substance of the

transaction rather than the form is the criterion for the

negotiability.

Sec. 11. Date, presumption as to.- Where the instrument o

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.

NOTES:Sec, 11 applies to 3 cases: (1) the instrument contains

the date of issue, in which case it is presumed to be the true

date of making or drawing; (2) in an accepted bill o

exchange, the acceptance is dated; in which case it is


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presumed to bethe true date of acceptance; (3) an

instrument is indorsed and the indorsement is dated, in

which case it is presumed to be the true date of

indsorsement. But all such presumptions may be rebutted by

competent proof to the contrary. The burden of proving

belongs to the persons who disputes the veracity of the dates

indicated.

Sec. 12. Ante-dated and post-dated. -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.

What is the rule on ante-dating and post-dating?

Sec. 12 contemplates ante-dating or post dating

where the parties have mutually agreed to such dating. An

instrument is post-dated when the date written thereon is

later than the true date of its issuance or delivery. Aninstrument is ante- dated when the date written thereon is

earlier than the true date of its issuance or delivery. The

general rule on such instrument is that an ante-dated or post-

dated instrument is not rendered invalid or non-negotiable by

that fact alone. It may be negotiated before or after the date

given as long as it is not negotiated after its maturity. The

only limitation is that the ante-dating or post-dating is not

done for illegal and fraudulent purposes. Further, title to the

instrument is not acquired as of the date written on the

instrument but rather as of the actual date of delivery.

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 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.

Is the date necessary to an instrument?

Under Sec. 6, the date is not necessary for the

negotiability of the instrument. However, the date may be

necessary; (1) where an instrument is payable at a fixedperiod after date but is issued updated; and (2) where an

instrument is payable at a fixed period after sight but the

acceptance is updated. In these 2 cases, any holder may

insert the true date of issue or acceptance.

Rhoda issues an undated instrument to Sioson, does the fact

that is undated affect is negotiability?

No. sioson can just fill in the true date of issues in order to

determine the date of maturity. But, the instruments

negotiability is not affected in accordance with sec. 6.

In the same example, suppose Sioson puts a false date on the

instrument and negotiates it to Lyn, an innocent party. What

are the effects?

The date Sioson inserted is void, but as to Lyn, she canenforce it against Rhoda as the performer is a subsequent

holder in due course. Remember the rule is that between 2

innocents, the one who made possible the commission of the

wrong bears the loss. Also, as to Sioson, the instrument

becomes void. This being in accordance with this section as

well as with sec. 12, that ante or post dating (which ever case

for fraudulent purposes renders the instrument void.

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 orde

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 upstrictly in accordance with the authority given and within a

reasonable time.

What are the 2 steps in execution of NI?

The mechanical act of writing the instrumentcompletely and in accordance with sec. 1, of NI

and

The delivery of the instrument with the intention ofgiving effect to it.

To what step does sec. 14 refer?

Sec. 14 refers to instrument that are not complete on its face

but delivered by the maker/drawer. It applies to cases where

the instrument is incomplete but delivered. The first step is

thus, not fully satisfied.

What are the 2 cases referred to in sec. 14? What are the

rules on each case?

1. PRIMA FACIE AUTHORITY TO FILL UP BLANKS-


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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 to

the blanks therein.

a. Material particular- may either be aparticular the omission of which will render

the instrument non-negotiable

Eg. Of (a)name of payee, of the drawer

Of (b)date, rate of interest, place of payment

any particular proper to be inserted in a negotiable

instrument to make it complete (given the circumstances

of the instrument)

o GIVEN 2 FACTS: (1) there is want of materialparticular in the instrument; and (2) there is

possession by a person other than the drawer or

maker THEN- the law presumes agency or

authority to fill up the blanks.

2 PRIMA FACIE AUTHORITIES TO FILL UP TO ANY

AMOUNT-

A signature in a blank paper delivered by a

person making the signature in order that the proper

may be converted into a negotiable instrument

operates as a prima facie authority to fill it up as

such for any amount.

1) GIVEN 2 FACTS: (1) A signature in a blank paper, and(2) the paper is delivered with the intention of

having converted into a NI (mere possession not

being enough) THEN- the law presumes

authority to fill up to any amount.

2) But, to hold PRIOR (before completion) parties liableTo a person filling up and to holder not a HIDC- (1)

the blank must be filled up strictly in accordance

with the authority given and (2) filled up within areasonable time. (Reasonable time depends on the

nature of the instrument, the usage of the trade or

business and the facts of a particular case sec. 193.)

so much so that lack of one of the two would

result in a failure to enforce the instrument

against said parties.

To a holder who is a HIDC- it is necessary that either

was followed for being a HIDG, he takes the note

(sec. 52)

o Complete and regular on its face;o Before it was overdue and without notice or

dishonor

o In good faith and valueo Without notice of infirmity in the

instrument or defect in the title of the

owner.

The maker or drawer cannot blamean innocent party for a mistake

which he himself made possible

(for not completing the notice).

THUS, failure to fill up strictly in accordance with authority

given and within a reasonable time is- a personal defense

This is so because it is available as a defense only as against

those holders not HIDC (including the person filling up). The

maker or drawer is not liable to them. But, as to HIDC, it is

not a valid defense. The maker is still liable despite the error.

WITH REGARD TO PARTIES AFTER FILLING UP, they are

estopped or precluded from claiming that the notice was not

filled up strictly in accordance with the authority given. As to

them, they negotiate the instrument for the value filled up

strictly.

Suppose: Toby executed a note I promise to pay Erwin or

order-------. Sdg. Toby then gave Erwin the note authorizing

him to place any amount not exceeding P5, 000. But Erwin

placed P10, 000 and negotiated it to Ian. Can Ian go against

Erwin? Can Ian go against Toby?

As to Erwin, being a party to the completion and having

negotiated the note for such value, Erwin, regardless of

whether Ian is a HIDC or not, can be held liable for the value

As to Toby, if Ian is not HIDC, Toby cannot be held liable for

the erroneous completion (Toby), the holder must be a HIDC

the note would be valid and effectual as if it had been

completed in strict accordance with the authority given and

within a reasonable time. While it is true that Toby did not

authorize such amount, by his negligence in making the

fraudulent act possible, he rather the Ian- an innocent party

must suffer the consequences of its acts.

If Ian, pretending to be a fan of Erap, secures his autograph

on a blank piece of paper and, then, writes a promissory

note over it, may Ian enforce the note? If Ian negotiate itToby, may the latter enforce the note against Erap?

Both may not enforce the note. Sec. 14, while it allows for the

filling up of a blank paper with a signature, does not give such

authority when the said paper with no intention of it being

converted to a NI. It does not matter whether Toby is HIDC or

not. Tobys remedy would be to go after Ian, the endorser.

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 validcontract in the hands of any holder, as against any person

whose signature was placed thereon before delivery.

What is the rule on incomplete and undelivered instrument?

Here, both stances in the execution of a NI are wanting. The

non-delivery of an incomplete instrument renders the note

unenforceable as against the person whose signature was

placed thereon and is a valid defense, not only between the

original parties but also against a HIDC. The law does not


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make a distinction when it says that it is not a valid contract

in the hands of any holder which includes a HIDC. It is, thus,

a real defense as it is available even as against a HIDC.

However, the invalidity of the instrument is only with

reference to parties whose signature appears on the

instrument prior to delivery. As to parties whose signatures

appear on the instrument after delivery, the instrument may

be invalid.

Suppose Toby, before he could complete a note, placed the

said paper between the pages of his book. Erwin who

borrowed the book and finds the said note, completes it,

signs Tobys name and negotiates it to Ian. Ian negotiates it

to Jon. Can Jon go against Ian?

As the note was incomplete and undelivered, Toby has a real

defense as against Jon. It does not matter whether Jon is a

HIDC or not. As to Toby, there was never any valid contract to

make him liable. But, Jon can still go against Erwin and Ian as

they are considered to be parties whose signature appear

after the delivery (Erwins signature would appear as an

instrument.)All notes when presented for payment arew persumed

to be complete and delivered. The purpose of sec. 14, 15 &

16 is to show what defenses are available to makers/drawers

upon the presentment of these instruments. For example, in

the hands of a HIDC when the note is originallly incomplete

and undelivered such presumption is only prima facie. Proof

of non-delivery may be presented to rebut the presumption.

In contrast, if the note was mechanically but undelivered, the

presumpiton is conclusive as to a HIDC. No proof may be

presentewd to rebut it.

It has been held that where the custody of the

incomplete instrument has been entrusted to another who

wrongfully completes and negotiates the note to a HIDC,

delivery to the agent is asufficient delivery to bind the drawer

or maker.

Thus, the defense is only a personal defense. The one who

being held liable may only show lack of delivery if and when

the holder is not a HIDC (may either an immediate party or a

holder not a HIDC). Once the holder proves that he is a HIDC,

the defense is no longer available.

What is meant by immediate parties

The termimmediate parties is confined to those who are

immediate, in the sense of knowing or bieng held know the

conditions or limitations placed upon the delivery of the

instrument. It means privity not proximity. The cretirion is

whether or not the party in question knows of the conditions

or limitationas placed upon delivery or the facts that the

instrument was not delivered but stolen. Thus, if a party

knows of such conditions or limitation, he is an immediate

party even if he is physically remote (eg. Maker indorsee

who knows)n (NOTE: While proximity is not the critirion, it is

highly improbable that the next party physically will not know

such conditions or limitations).

What may the maker, drawer, indorser show as against the

immediate party or a holder not a HIDC?

As against such parties, he may prove that: (1) no delivery

was made; or (2) if there was a delivery, it was not

authorized; or if the delivery was made or authorized, the

delivery was conditional or for a special purpose and not for

the purpose of transferring the title to the instrument. In

conditional deliveries, what is conditional is the delivery, not

the promise or order to pay. If the promise or order to pay is

conditional, the instrument is rendered non-negotiable. Eg. A

deliver the note to B with the condition that the delivery be

binding only if Cs signature was secured. The delivery is not

binding on A until Cs signature appears thereon. (The

promise or order to pay remains unconditional on the face.)

As to special purposes, if a delivers a bearer instrument to B

for (1) safekeeping or (2) for collection, B cannot enforce the

note against A.

What is the rule on lost or stolen instrument?

As soon as the owner discover that he has lost a NI, he should

instantly give notice of the lose to all parties on such paper

and inform them not to pay the amount to any one except to

the loser or is order. This is especially important in bearer

instrument (but may also apply to order instrument). No title

to a lost bill or note vest in the finder and the owner when he

has identified it, may maintain ero an action where the

defendant found an article and refused to return it to the

owner) against the finder. If the finder has negotiated it and

has received value for it, an action for money be maintained

against him for such use. A party liable will net be discharged

if he pays the amount to the holder of the lost instrument

before maturity or if he had notice of the loss unless the

holder is a HID. (in such case, the party liable should recover

from the finder).

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 coursethe 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


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signature appears thereon, a valid and intentional delivery

by him is presumed until the contrary is proved.

What is the general rule in Sec. 16?

Every contract on a NI even if it is completely written

is incomplete and revocable until its delivery. Before delivery,

the maker or drawer can revoke, cancel or tear up the

instrument. The payee named therein acquires no right until

the instrument is delivered to him. Delivery is essential to the

validity of any NI. An undelivered instrument is inoperative

because delivery is a prerequisite of liability. However, if a

complete instrument is found in the possession of an

immediate party or a remote party other than a HIDC, there is

a prima facie presumption of delivery but subject to rebuttal.

If the holder is a HIDC the presumption becomes conclusive

and not subject to rebuttal.

If the note is found with immediate party or a holder

not a HIDC, the one being held liable can show that delivery

was not made either him or under his authority. (Deliverymay be made by the maker/ drawer himself or through an

authorized agent. Delivery may also mean issuance.) But, if

the note is with a HIDC, the one being held liable cannot

prove such because he is conclusively presumed to have

delivered it. Thus, is a maker denies having delivered a

complete note, the holder must only show that he is a HIDC

and the former can no longer prove his accusation.

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:

(a) Where the sum payable is expressed inwords 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 runsfrom 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;

(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 "

promise to pay"is signed by two or more persons

they are deemed to be jointly and severally liable

thereon.

The rules stated shall not be availed of if the terms of the

instrument in question are clear and admit of no doubt. It is

only when the instrument in question is ambiguous, doubtfu

or obscure or when there are omissions therein will the rules

apply.

EXAMPLE OF THE RULES:(a) Where a PN reads twelve pesos in its body and P

1,200 (in figures) at the margin, the note is good only

for P 12. The reasons are: (a) the figures in the

margin do not form part of the instrument and is

only for convenience: (b) it is easier to change the

figures or to commit a mistake than a sum in words

But when the words are ambiguous or uncertain as

when the letter Y in eighty thousand is unclear

(with P8,000 on margin) or when the note is payable

for one pesos ( with P 100 on margin) or P365 is

written as three sixty five pesos, the margina

figures control.

(b) Where the note stipulates that the amount to bepaid is with interest at ______% from____, it is

deemed payable from the date in the note or if issue

at the legal rate.

(c) Where the note states I promise to pay to the ruleof J.M ONLY P 10. sgd. X. with J.M ONLY in

handwriting, the note is non-negotiable as it is

payable to a specified person only. The handwritten

words prevail because the written words are

deemed to express the true intention of the maker

because they are written by him while the printed

words are printed with no contract in view.

(d) Where a note states I promise to pay Erwin or ordeP 10. sgd. Toby. Ian, the payee or holder may treatit as either a note or bill according to his preference.

(e) Usually, the signature of the maker/drawer is placedin the lower right hand corner if the face, the

acceptor across the face and the indorser at the

back. Where it is not clear which if the three a

person belongs as he signs on the margins, he is

presumed to be an indorser.


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(f) Where a note states I promise to pay C or orderP10. sgd. A&B., the makers are deemed to be

solidarily bound.

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 expressly 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.

What is the general rule? Exceptions?

GENERAL RULE: A person whose signature does not appear

on the instrument cannot be held liable thereon

EXCEPTIONS:

(1) The principal is liable if duly authorized agent signson his own behalf (Sec. 19);

(2) In case of forgery is liable even if his signature doesnot appear on the instrument (Sec. 23);

(3) Where a person sought to be charged signs on paperseparate from the instrument itself, as in an allegealthough the allege may be considered a part of the

instrument, or where an acceptance is written on

another paper other than the bill (Sec. 134 & 135);

(4) Where a person signs under an assumed or tradename- not really an exception, rather an instance

where a persons business name serves the same

purpose as his signature. There must be an intention

to be found by signing the trade name.

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.

a. The party may sign personally or thru anagent. Agency may be oral or written

authority. It may be proved by oral or

written evidence, unless specific provisions

of the general law require otherwise (eg.

Statute of Frauds).

Sec. 20. Liability of person signing as agent, and so forth.-

Where the instrument contains or a person adds to hissignature 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.

What are the requisites for an agent to escape liability?

(1) The agent must be duly authorized.

(2) Must add words to his signature indicating that hesigns as an agent, that is, for or on behalf of a

principal.

(3) Must disclose his principal.EXAMPLES

Of no.2 - Jose Cruz by Pedro Vega Pedro Vega as

agent of Jose Cruz

Of no.3sdg. Pedro Vega, agent Vega is liable as

he fails to disclose his principal (even if he acts within his

authority). Agent is deemed as merely a descriptive word,

also trustee, administrator one is not relieved from

liability by adding descriptive words.

Of no. 3the disclosure of the principal in order to

relieve the agent need not be in signature (can be in the

body). Eg. I promise to pay X or order P100 for money

loaned to Y & Co. sgd. J, Treasurer. The principal is obvious.

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 incase the agent in so signing acted within the actual limits of

his authority.

What is the authority of an agent by procuration?

This agent has but a limited authority to sign and he must act

within the limits of his authority. The words per proc. or

p.p.serves as a notice to whole world that the agent has

but a limited authority. It is the duties of the 3rd person

dealing with such agent ascertain the limits of the agents

authority. He must remember that he is dealing at his own

risk.

FORM: Jose Cruz (principal), per proc.: Pedro Vega (agent)

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 no liability thereon.

What is the rule: a minor or corporation indorsing?

Ordinarily, a minor cannot give consent to contracts and acontrast entered into by him is avoidable. In the case of

corporations, they cannot perform acts beyond the escape of

their authority. Such acts would be ultra vires Never the less,

if a minor or a corporation endorsee an instrument, the

endorsee acquires titles to it and can enforce it agains the

maker or acceptor or other parties prior to the minor.

Suppose: Lyn prepares a note for Paz, I promise to pay Paz

or order P1, 000. sdg. Lynn But Paz is only a minor. Paz


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negotiated the instrument to Lawrence. Can he hold Lynn

liable Paz?

Lawrence can hold Lynn liable because he acquires title to the

instrument by virtue of sec. 22. The instrument is validly his.

But Lawrence cannot hold Paz liable because Paz has a valid

defenseher minority. Minority is real defense in the sense

that the Paz may use it as against any holder (even a HIDC).

But, Lynn cannot make use of the same defense as it ispersonal to the minorPaz. Further, as maker, Lynn warrants

the existence of the thing as well as the capacity of the payee

to enter into the contract. The maker is therefore precluded

from putting up the defense that the payee had no capacity.

Sec. 22 is also applicable to endorsements by lunatics,

imbeciles, and other incapacitated parties.

Sec. 23. Forged signature; effect of. - When a signature is

forged or made without the authority of the person whosesignature 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.

What is forgery?

By forgery is meant the counterfeit making or fraudulentalteration of any writing, and may consist in the signing of

anothers name or the alteration of an in strument in the

name, amount, description of the person and the likes, with

intent to defraud. The intent to defraud distinguishes forgery

from innocent alterations and spoliation.

What are the forgeries not referred to in sec. 23?

- fraud in factumor fraud in esse contractus.Here, there is fraud in the sense that ther was

really no intention to issue an instrument. As itamounts to forgery, it has the effects of forgery

such that it is a real defense.

eg. B obtains the signature of A by

telling A that it is only for autograph

purposes or that it is for some

document (other than a NI) then B

converts the paper into a NI. The fraud

here amounts to forgery.

This must be distinguished from fraud in document

because the letter is only a personal defense as

there really was an intention of issuing an

instrument. Eg. A sell to B a diamond rings showing

the merchandise to A. But it is only glass. A makes

out a check in Bs favor for it. While the consent is

vitiated, thus rendering the contract voidable, there

was still intent to issue a check. The defense is only

available as against the party who perpetrated.

- Duress amounting to fraudordinarily, duress isa personal defense. The only

exception is if it amounts to forgery as when someone

forcibly takes ones hands

and affixes that the persons signature. Here, there is a

real defense as there was no intention of issuing a

negotiable instrument.

- Fraudulent impersonationin such cases, themaker/drawer is said to have a/double intent.

First he intends to make the instrument payable

to the person before him or in front of himthe

person is he is dealing with regardless of

whoever he is. The 2nd

intent is that he intends

that it be payable not to the person in front of

him but to the real personthe payee that this

person says he is. In general, the rule is if the 1st

intent was present the maker/drawer is liable.

So, what is important is the determination of

who the payee intended is.

Eg. A person approaches me and says, I am Pablo

I have a check in my favor for P10, 000. But the person is

really Pedro. Now I issue a check in the name of Pablo.

What is my intention?

1st : I intend to the check to the person in

front of meto the person I am

dealing with. It does not matter whether his name is

Pablo or Pedro. I am making

the transaction because of what he offers regardless

of his identity.

2nd

: I intend to make the check payable to

the real Pablothe person who

Pedro says he is.

(a) The 1stintent governs because of the theory ofactual intent and of stopped or negligence. If the

check is encashed, the bank, in paying Pedro

would merely give due course to my real intent

that it be paid to the person I directly dealt

with and to whom I intended it to be paid to.

Secondly, because the bank is innocent as I am

too, and as between two innocent parties, the

one who was negligent must be bear the loss. I

was negligent is not ascertaining his identity. I


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am stopped to deny my real intent because it

was within my power to ascertain but that I

failed to do so.

(b) The 1stintent cannot rule when themaker/drawer issues to a person an instrument

where the person before him purports only to

be an agent of the intend payee (given: maker

wasnt negligent).

What type of forgery does sec. 23 refer to?

Sec. 23says, when a signature is forged it applies

therefore only to (1) forged signatures (forger does not

purport to be an agent of the person whose signature he has

forged) or (2) signatures made without the authority of the

person whose signature it purports to be (forger purports to

be agent but has no authority). If the problem is something

else other than the signature, then sec. 23 will not apply. If

what was changed was the amount or the name of the payee,

sec. 124 on material alternation rather than sec. 23 should

apply.

What are the three fundamental rules as to the effect of

a forged signature?

that the signature forged or made without

authority is wholly inoperative;

that no right to retain the instrument, or to

give discharge therefore or enforce

payment thereof against any party thereto

can be acquired through or under such asignature forged or made without authority.

That, nevertheless, as against a party

preclude from setting up to the forgery or

want of authority, the signature forged or

made without authority is operative, and,

rights to retain the instrument the

instrument, to give discharge therefore , or

to enforce payment thereof, can be

acquired through or under the signature

forged or made without the authority.

What is meant by it is wholly inoperative?The word it refers to forged signature, not to the

whole instrument. It means that the forged signature cannot

be used to transfer title ever that the instrument to another

person. The forged signature cannot operate to transfer title

to another. Because the signature is inoperative, the holder

never acquires valid title to the instrument so that it is a real

defense as against any holder.

EXCEPTIONS:

1) but, only the signature forged or made withoutauthority is stated by the law to be inoperative,

neither the instrument nor the genuine signatures

are rendered inoperative. Proof that the one of

several signatures in a note was forged does not

necessarily avoid the note as to those whose

signatures as are genuinesuch as those who

actively procured the forgery or had knowledge.

2) further, the instrument can be enforced by holdersto whose title ever the instrument the forged

signature is not necessary., such as, an endorsement

of an instrument which on its faco is payable to

bearer. Whether an indorsement on a not necessary

for the holders title is genuine or forged is

immaterial to his right to recover such instruments

can be negotiated by mere delivery so that the

forged signature is irrelevant to his title.

PROBLEM: A made a Promissory note I promise to pay B

or order P1, 000. sdg A. A is the maker and B is thepayee. B however lost the instrument. C found it and

simulated the signature of B and negotiated the

instrument to D. D negotiated it to E. Can E go against A,

B, C, D? Explain.

ANSWER:

First, does this problem involved sec. 23, forgery of

a signature? Obviously, it does. Second, find out where

the forgery occurred. In this case, the forgery occurred at

the point of C. So this is the cut-off point. All those below

or subsequent to the cut-off point. Are liable to theholder. All those above or prior to the cut-off point are

not liable to the holder.

Visually

A } not liable

B } not liable

---------------------- cut-off point

C } liable

D } liable

E } holder(1) as to D, under sec. 23, D is preclude from setting up

the defense of forgery. This is because, under sec. 65

& 66, an indorser warrants that an instrument is

genuine and in all respects what it purports it to be.

In other words, when D negotiated the note to E, in

effect, he said, the instrument is genuine and it is

valid. Having impliedly said this, he cannot

thereafter say that the instrument is invalid. He is

stopped by his own warranty.


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As to C, being the forger, he is guilty of a

criminal offense and is liable for all the

consequence of his criminal act. But, more than

that, under sec. 18 as an exception to the

general rule, the forger is liable as he is deemed

to have signed under a trade name or assumed

name. Thus, the forger has the same warranty

as the general indorser. Otherwise, the forger

would be occupying a position better than of a

general indorser.

(1) As to B, because under sec. 10 A person wheresignature does not appear thereon is not liable on

the instrument. B did not sign. Somebody signed for

him without his authority. His signature does not

appear on the instrument and thus, he cannot be

liable thereon. Moreover, under sec. 23, the forged

signature (made by C) is totally or wholly

inoperative. Therefore, no title was validly

transferred from B to C to D to E. therefore E

acquired only the right that cannot be upheld as

against B and any party prior to the forgery, it being

wholly inoperative, there is no right even to retain

the instrument or to enforce payment thereof

against any party thereto.

(2) As to A, insofar as A is concerned, the signatureforged is wholly inoperative and therefore it did not

validly transfer title to the instrument to E. And E as

against A has no right to retain the instrument ant to

enforce payment thereof. (Further, A bound himself

to pay the order of B. E cannot be regarded as such.

SUPPOSE: In problem 1, the note was a bearer instrument but

C, in forging Bs signature, indicated that it was payable to

him in the back was put Pay to D. sgd.C. D negotiated it to

E, Pay to E. sgd.D Can E now go against A,B,C,D?

(1) Sec. 23 applies only the instrument payable to ordernot to those payable to bearer. The forged signature

of B is not necessary to the title of the holder. The

holder can even cross out all those indorsement not

necessary (sec. 48). Once an instrument is payable to

bearer, it will always remain a bearer instrument not

withstanding the special indorsement. If the crosses

them out, it will be as if the note was delivered

directly in him. Therefore. E can hold A, B, C, D.

While the cut-off point rule is used above in

the situation of an indorser, it is also

applicable to forgeries of a

makers/drawers signature such that all

parties such that all parties below the cut-

off point (all parties subsequent to the

maker/drawer) can be held liable but not

the maker/drawer. Further, under sec. 18

he whose signature does not appea

thereon is not liable on the instrument.

Who are precluded from setting up the defense of forgery?

Those who warrant or admit the genuineness of the

signature in question:

indorserwhether general or qualified, warrant that theinstrument is

genuine and in all respects what it

purports to be (sec. 65 & 66)

person negotiating by mere deliveryalso by sec. 65. Acceptorsby accepting the bills, he admits genuineness

Those who, by their acts, silence or negligence are

stopped from setting up the defense of forgery.

Whenever a party has, by his own declaration, act

or omission, intentionally and deliberately led

another in believe that his or anothers signature in

an instrument is genuine, an to act upon such belief,

he cannot, in any litigation, a rising out of such

declaration, act or omission, be permitted to set up

the forgery of such signature. Stopped arises from:

(1) a declaration;(2) an act;(3) omission or negligence(such as unreasonable

delay)

What are the causes of forgery in general?

I. Forgery of promissory notes:

i. forgery of an endorsement in thenote;

2.)forgery of the makers signature

II. forgery of bills of exchange:

a) forgery of an indorsement in the bill;b) forgery of the drawers signature.

a. with acceptance by the drawee, orb. without such acceptance but the bill is paid

by the drawee.

The cut-off point rule discussed above is a

sufficient guide to see who can be held liable on

instruments payable to order whether the forgery

is of the indorsement or makers/drawers

signature. What remains to be discussed is the

liability of the drawee in bills where the

indorsement is forged. (below)

As mentioned, when the note/bill is payable to

bearer, sec. 23 is not applicable but a holder who


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is a HIDC can recover not by virtue of sec. 16

(given the instrument is complete).

As to the acceptor, his acceptance precludes him

from setting up the defense of forgery by virtue of

his warranties in accepting. Also, in paying without

previous acceptance, the drawee cannot collect

from the drawer nor the recipient HIDC. The

acceptor is deemed constructively negligent in

failing to meet its obligation to know itscustomers (drawer) signature. The basis of such

liability is not that payment is tantamount to

acceptance but that of his negligence. (Here it is

the drawers signature which is forged).

What rules used govern checks?

The same rule used for the other NI the cut-off point rule

with the exception of the determination of the drawee

banks liability vis--vis each other.

METRO BANK VS. FNCB(118 SCRA 537)

Cunanan & Co. drew a check for P 50, 000 with FNCB as the

drawee in favor of Manila Polo Club. By unknown

circumstances, Sales was able to obtain the check, altered the

same (making it payable to cash and for P 50, 000) and

deposited it with Metro Bank. MB then sent the check to the

CB clearing house with stamp on the back: Metro Bank

clearedoffice all prior endorsement and/ or lack of

endorsement guaranteed. the check cleared the same dayand FNCB paid MB the P 50, 000. Within 6 days, Sales whose

account was credited with the amount, withdrew the money.

But before the last withdrawal, MB, alarmed at the activity of

the account, clarified the matter with FNCB which gave its

approval. Upon receipt of the check, Cunanan notified FNCB

of the alternation. FNCB asked MB to reimburse the amount

but the latter refused. Who is liable?

SC declared that under CBC no. 9, the drawee bank

(FNCB) must return the check within 24 hrs. from receiving it

from the CB clearing house to the collecting bank for any

defect such as an alteration. The stamped guarantee of MB

must be read with CBC no.? That the liability of the collectingbank on such stamp is limited to the said 24 hrs. Here, FNCB

returned the check only after 9 days. Further, the approval

given by FNCB of the last withdrawal shows the drawees

negligence and stopps them from claiming otherwise. FNCB IS

LIABLE.

CBC No. 9 has been superseded by CBC No. 580

(1997). Under 580 the attention of the collecting

bank must be called within 24 hrs. from the date of

discovery of the fraud, forgery or material alteration.

If the case happened at present, MB would have to

reimburse FNCB for the amount.

This case, strictly speaking, involves material

alteration and is not applicable to Sec. 23 except as

tro the liabilities of the drawee bank and the

collecting bank in cases falling within the scope of

Sec. 23.

Therefore, if the drawee bank is vigilant as to inform

the collecting bank within 24 hrs. from discovery,

the liability for forged checks will lie with the latter.

The remedy of the collecting bank is to insure itself

against such losses. If the public cannot hold the

collecting bank liable, it will no longer use checks but

rather cash. Commercial transaction s will bog down.

Consequently, the economy will stand still and the

banks will suffer. The drawee bank is liable only for

the signature of the drawer. It is only to such party

that the bank has privity with. The collecting bank

has privity with the depositor who is the principal

culprit in the case. Thus, it has duty of diligence.

II. CONSIDERATION

Sec. 24. Presumption of consideration. - Every negotiable

instrument is deemedprima facieto have been issued for a

valuable consideration; and every person whose signature

appears thereon to have become a party thereto for value.

What does this section provide?

Under this Section, the mere introduction o

negotiation of a note raises a disputable presumption of a

sufficient consideration . It is unnecessary to aver or prove

consideration, for consideration is imported and presumed

from the fact that it is a NI. The person (maker/drawer or

indorser) claiming that a payee or indorsee did not give

valuable consideration for an instrument must prove that

there really was no valuable consideration given.

Sec. 25. Value, what constitutes. 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.

What is valuable consideration?

Consideration means inducement to a contract that

is, the cause, motive, price or impelling influence which

induces a contracting party to enter into a contract. Valuable

consideration consists either in some right, interests, profit or

benefit accruing to the party who makes the contract, or so

forbearance, detriment, loss or some responsibility to act or

labor, or service given, suffered or undertaken by the othe


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side. Consideration founded on (1) love and affection, or (2)

upon gratitude, is good consideration, but does not

constitute such valuable consideration as is sufficient to

support the obligation of a bill or note, as between original

parties. Included on this are gifts, services without

expectation of compensation, moral obligations. These are

not valuable consideration contemplated by the NIL.,

although the same are considered so by the Civil Code. A

valuable consideration need not be adequate. It is sufficient if

it is a valuable one.

Sec. 26. What constitutes holder for value. - Where value

has at any time been given for the instrument, the holder is

deemed a holder for value in respect to all parties who

become such prior to that time.

What is a holder for value?

One who gives valuable consideration for an

instrument issued or negotiated to him is a holder for value.

ILLUSTRATION: A, maker, B, payee. B indorses to C, C to D, Dto E, holder. Between A & B no valuable consideration.

Between B & C valuable consideration is given. Between D &

E it is not known whether value was given. E is a holder for

value as to A, B and C because at Cs time there was valuable

consideration given and A, B, and C were partiers prior to the

time when value had been given. As to D, it is not known.

Sec. 27. 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.

Suppose: Erwin, out of love and affection, issued a

promissory note in favor of Anne Marie, I promise to pay

Anne Marie or order P1,000.00. sgd. Erwin. As a birthday

gift. But Anne Marie owes Peter P6000.00. Because of the

persistence of Peter for AM to pay him, she surrenders the

instrument to him. Peter is now the holder. Can Peter go

against Erwin?

Given the lack of valuable consideration between

Anne Marie and Erwin applying Sec. 27, Peter is considered a

holder for value to the extent of his debt or lien- P600 and

can go against Erwin for such amount. As to the P400

remaining, as Peter is not considered a holder for value tosuch extent, he may not collect it. Absence of consideration,

being a personal defense (Sec. 28), can be used as against

those not HIDC. Since being a holder for value is one of the

requisites of a HIDC, Peter can not be considered as HIDC and

thus, the defense of lack of consideration is available to Erwin

as against Peter. HOWEVER, if sufficient consideration existed

between Anne Marie and Erwin, Peter may collect the entire

sum subject to the obligation to return the excess to AM. But,

also, if the defense of Erwin is a real defense, Peter may not

recover from the instrument despite his lien.

Sec. 28. 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.

What is absence of consideration? Failure of consideration?

Distinguish the two.

Absence of consideration is a total lack of any valid

consideration such as when the consideration for commercia

paper is clearly fraudulent. Failure of consideration is the

neglect or failure of one of the parties to give, to do or to

perform the consideration agreed upon. Want or absence of

consideration embraces transactions where no consideration

was intended to pass while failure of consideration was

contemplated but that it failed to pass.

Illustrate partial failure of consideration.

Suppose that in a note for P1,000.00 the extent of

want of consideration is only P600.00 That is, B., payee, gave

A, maker valuable consideration to the extent of P400.00. A

can interpose want of consideration pro tanto, o

proportionate- only to the extent of P600.00. C, holder, if he

is not a HIDC, can only collect from A P400.00. But, if he were

a HIDC, he can collect the entire amount.

What kind of defense is absence or failure of consideration?

Failure or absence of consideration , whether tota

or partial, can be interposed as a defense only against

persons not HIDC but not against HIDC. These defenses are

therefore, only personal or equitable defenses.

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 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.

What is an 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. The requisites therefore are : (1

he must be a party to the instrument, signing as maker

drawer, acceptor or indorser; (2) he must not receive value

therefore; and (3) he must sign for the purpose of lending his

name or credit. Thus, it is not a valid defense that the

accommodation party did not receive any valuable


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consideration when he executed the instrument as the law

requires such absence. (In contrast, under the Civil Law, the

absence of consideration renders the contract defective.) The

placing on the note of the words value received does not

negate the character of the note as an accommodation

paper. The phrase without receiving value therefore means

without receiving value by virtue of the instrument and not as

it apparently is supposed to mean, without receiving payment

for lending his name.

ILLUSTRATION:

1. ACCOMODATION MAKER- A wanted to borrowmoney from B. But B would not lend the money to A

because of the formers bad reputation. A would

only lend B the money if the lat

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