NIL Midterm

NEGOTIABLE INSTRUMENTS LAW Atty.
Bernardino Amago l For the exclusive use of EH 404 2016-2017
PRELIMINARIES FUNCTIONS OF NEGOTIABLE INSTRUMENTS
HISTORY OF NEGOTIABLE INSTRUMENTS LAW What are the functions of negotiable instruments?
1. It is a substitute for money
The use of Negotiable Instruments dates back as early as the 2. It is a medium for exchange
Tang Dynasty. 3. It is a medium of credit transactions
It is not surprising that NIL originated from Chinese tradition. After all, 4. It is a means of making immediate payment
they are known for trading. Their trades extended beyond their own
community. Lawlessness must have been a common theme, thus it It is a substitute for money
would have been dangerous to bring large sums of money while you are A negotiable instrument, while it is not money, is a substitute for money,
trying to also bring your products. This must have led to the idea that eliminating the risk of dealing in cash.
instead of bringing actual cash, it would be safer to bring a
representation of such cash. To illustrate the difference between money and a negotiable instrument:
The practice trickled to the Middle East, then to Europe. 1. Money, when transferred because of a particular transaction
results to termination if it is considered payment. However, for
It was in London where the law was first codified under the English Bill negotiable instruments, that which is transferred is not considered
of Exchange Act of 1882, which is the precursor or model law of the US payment unless encashed.
known as the US Uniform Negotiable Instruments Law of 1896.
2. Money retains its value even if transferred to multiple individuals.
However, not all states accepted the US Uniform until negotiable In contrast, a check (which is a negotiable instrument) which is
Instruments Law. They believed that there was a need to further transferred to multiple individuals, wherein one becomes
improve the Law. Thus, they enacted the U.S Uniform Commercial Code bankrupt, results in the loss of value when it reaches the last
which actually is the basis of most commercial laws of the Philippines person.
(and the world for that matter)
Nevertheless, the purpose of the law is to place negotiable instruments
Example: Laws on Letters of Credit here in the Philippines is largely on such footing that they would be freely accepted like money without
based on the US Uniform Negotiable Instruments Law question in commercial transactions and thereby facilitate trade.
Negotiable Instruments Law in the Philippines It is a medium for exchange

The Philippines has copied most of the US Negotiable Instruments Law It allows transactions to be closed and allows exchange of assets to
with the exception of certain provisions which even US courts had a hard happen even if there is no actual cash. It thus increases the purchasing
time making a stand on. This was the basis for the creation of our own medium in circulation, doing away with the active handling of money
Negotiable Instruments Law. Thus, under Act 2031 on Feb 3 1911, our and the need to physically count bills and coins whenever payment is
Negotiable Instruments Law came to fruition, which became effective made in financial transactions.
on June 2, 1911.
To illustrate:
Relevance of studying the history of NIL You would be willing to give to another party your assets (ex. A car) by
the simple exchange or handing down of a check. This check represents
Knowing the period during which a particular law is enacted will help
the value of money.
people understand why the words or language found therein were the
ones used in the enactment of the law. The practices of the period and
It is a medium of credit transactions
culture of that time will help in understanding the law as a whole.
The instrument is a representation of one’s credit. It is called credit
because it takes into account one’s ability to pay, one’s wealth or
NIL APPLICABLE ONLY TO NEGOTIABLE INSTRUMENTS reputation.
The NIL is only applicable to Negotiable Instruments
When one does not receive cash in itself, credit actually ensues.
Topics such as negotiable documents of title (under Sales) has no
application in NIL because the same is covered under the Civil Code. Example: One can receive an instrument which is payable after 30 days
The adjective and substantive aspects, the remedies of the parties are only, and you are still willing to close the transaction. With the passage
found in the NIL itself. It is therefore imperative to determine whether of time, you are actually allowing credit to happen.
a document is negotiable or non-negotiable
Credit presupposes that there has been no actual payment of money
Take note: NIL will only find relevance if the instrument is negotiable (If yet, but despite such facts, the transaction is deemed closed or
it is not, other laws such as the Civil Code may apply) perfected.
Purpose of NIL It is a means of making immediate payment

To facilitate and regulate commercial transactions. Payment here does not mean that of the Civil Code. Rather, payment in
the sense that the transaction has been completed, is closed, with the
Example: It would be inconvenient to bring 1M pesos to a buyer of a mere transfer of that instrument as a representation of payment.
parcel of land, and having to count the money in front of the purchaser.
This was born out by the circumstances of the time considering that Example: X can transfer his whiteboard marker to Y, if Y gives a piece
trade was already popular beforehand. of paper saying that Y owes X P1 million payable to X or to his order.
When the paper is given to X, X deems it as payment. Thus, X in effect,
gives the white board marker.
1|U N I V E R S I T Y O F S A N C A R L O S
NEGOTIABLE INSTRUMENTS LAW Atty. Bernardino Amago l For the exclusive use of EH 404 2016-2017
CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS FORM OF NEGOTIABLE INSTRUMETS

What are the characteristics of negotiable instruments? Relevant provision
1. Negotiability Section 1. Form of Negotiable Instruments. – An instrument to be
2. Accumulates secondary contracts negotiable must conform to the following requirements:
a) It must be in writing and signed by the maker or drawer
NEGOTIABILITY b) Must contain an unconditional promise or order to pay a sum
Negotiability refers to the quality or attribute of an instrument to be certain in money
transferrable from one person to another, and whoever holds that c) Must be payable on demand, or at a fixed or determinable future
instrument, holds such against defenses of prior parties. time
d) Must be payable to order or to bearer
Example: A extended a loan of 1M to B which B should pay 30 days e) Where the instrument is addressed to a drawee, he must be named
after. Before 30 days, A assigned his rights to C. What is his right? The or other indicated therein with reasonable certainty.
right to collect the amount of 1M pesos to B. But instead of saying that
he has 1M worth of rights, he says that he actually 2M and assigns such
right to C. IT MUST BE IN WRITING AND SIGNED
BY THE MAKER OR DRAWER
Question: When C goes to B to enforce his right, will B be compelled
MUST BE IN WRITING
to pay the amount of 2M pesos?
Ans – No. Because C only steps into the right of A which only has a right Form of writing
to the extent of 1M. Any form of writing will do. It can also be printed, typewritten, or
stamped, as long as there is a manifestation in physical form the
TN: The situation does not apply when A stole a negotiable instrument language of your obligation.
from B in the amount of 1M and then negotiates said instrument to C
(hands down the instrument to C). Material
There is no requirement as to the material used. It can be on any
Question: If C goes to B to demand payment of 1M pesos, can B allege material as long as it can be transferred from one hand to another.
that A stole it from B, so he should not pay C?
SIGNED BY THE MAKER OR DRAWER
Ans – No. Because the negotiable instrument has the characteristic of
Negotiability. Thus, it is free from the defenses of prior parties. The Difference between maker and drawer
instrument will remain payable to C.  A maker is the one who makes a promise to pay in a promissory
note. He is personally liable to pay.
ACCUMULATES SECONDARY CONTRACTS  A drawer is the one who issues a bill of exchange to order a
The most important feature of negotiable instruments is the payment to be made. He orders someone to make the payment.
accumulation of secondary contracts as they are transferred from one
person to another. Once an instrument is issued, additional parties can TN: Maker or drawer does not have to be the one who writes, as long
become involved. as he/she is the one who signs.
Example: A issues a negotiable instrument in favor of B. B negotiates Location of the signature

to C. C negotiates to D, and then D to E. A and B have a contract. B and The signature may appear in any part of the instrument. It can appear
C also enters into another contract. The same for C to D. And then from at the back or on the face of the instrument. There is no requirement
D to E. (A total of 4 contracts) on where the signature should be placed.
Question: If the instrument has already matured, where can E go for It can be signed anywhere provided that such signature signifies the
payment? intention by the maker or drawer to be bound by the instrument
Ans – E can go to any of the parties for payment. He can go to A for
payment. If A refuses, E can go to either B, C, D because E already holds Type of signature
an instrument which holds all the contracts which the previous parties There is no requirement, as long as there is intent to be bound.
entered into prior to his contract (referring to E). It is as if E has
contracts with B, C, and D. This is because it can accumulate secondary  If the signature was a heart: Valid
contracts (save for certain limitations).  If the signature was “Taylor Swift”: Still Valid
There is no requirement as to what signature you’ll place, for as long as

NEGOTIABLE INSTRUMENT DEFINED that mark or signature or whatever initials you place are indicators of
What is a negotiable instrument? your intent to be bound by the instrument.
A negotiable instrument is one used in commercial transactions and
which complies with all the elements of negotiability provided for under TN: But of course, if you will run counter to the usual practices of a
Section 1 of the Negotiable Instruments Law. particular place, wherein you’re supposed to make a signature using
your name or at least one that is artistic enough not to indicate it as any
Does it have be negotiated before it becomes negotiable? other person’s name, then it may prevent the instrument from being
Yes. It has to be negotiated before it becomes negotiable. It has to be accepted. It can affect the acceptability of the instrument if you don’t
used in a commercial transaction. If it is not used for a commercial comply with the usual practices. Then again, as to whether it will affect
transaction, while it bears all the elements under Section 1, it cannot be negotiability, it will not.
considered a negotiable instrument.
MUST CONTAIN AN UNCONDITIONAL PROMISE OR AN INDICATION OF A PARTICULAR FUND OUT OF WHICH

ORDER TO PAY A SUM CERTAIN IN MONEY REIMBURSEMENT IS TO BE MADE OR A PARTICULAR ACCOUNT TO BE
DEBITED WITH THE AMOUNT
UNCONDITIONAL PROMISE OR ORDER TO PAY
What about if “payable out of a particular fund?”
Non-negotiable. There is a condition placed on the promise or order to
Condition
pay. There is a condition that the particular fund does exist and that the
Any future event which may or may not happen. It could also refer to a
fund is sufficient to pay.
past event not known to the parties which give rise to an obligation or
extinguishes an obligation.
When you are trying to make a promise or an order, it extends to your
general created and not just to a particular portion of a credit.
TN: To make it not negotiable, the condition must be put to the promise
or the order to pay.
Section 3 says that if there is a fund specified for which a payment for
the obligation will be made, it will make the instrument conditional.
Unconditional
It is not contingent on the happening of a future event; not subject to
What about if “Reimburse from a particular fund?”
any condition.
A statement specifying the particular fund from which reimbursement
can be made or that fund which may be debited or deducted or a
Promise v. Order to Pay
statement of the transaction does not affect the character of order of
promise as being unconditional.
Promise Order
The condition is imposed not on the order to pay but on the
Pertains to a promissory note Pertains to a bill of exchange. reimbursement which has nothing to do with the negotiable instrument
anymore. The existence of the fund does not extend to the order to pay.
It only extends to the reimbursement. Therefore, whether or not there
Parties – maker and payee. Parties – Drawer, Drawee, and is a monthly salary, there is still a requirement to pay.
Payee.
A STATEMENT OF THE TRANSACTION WHICH GIVES RISE TO THE
INSTRUMENT.
Refers to a person directing
It is the person primary liable another person or himself to pay What about if “Subject to the terms of a loan contract?”
who obliges himself on the on the instrument; requires an If I am the holder of that instrument and I do not know what the loan
instrument additional act on the person contract provides then I may not able to demand payment. It may also
primarily liable- that is, by be easy for the loan-maker to say that there is no loan contract or that
accepting the instrument the terms are not complied with. It is made to depend on a separate
contract and it sets a condition. It makes the promise conditional.
Is death a condition? What about if “Arose from a loan contract?”

No. Death is not considered a condition because everyone is certain to You are made to promise to pay because of a loan contract. Whether or
die. It is the exact time when death will happen is uncertain but death not the contract exist does not matter. It is merely stating a transaction
itself is certain. It is just a period. which brings about the promise to pay.
What about death because of cancer? The promise to pay here already exists whether or not the loan contract
It is a condition. While everyone dies, it may not be of cancer. It is exists. The instrument can stand on its own. It will not affect the
uncertain to happen that a person dies because of cancer. negotiability.
Statements added to the instrument which do not affect its TN: Section 3 (b) provides that the statement of a transaction that gives
negotiability rise to the instrument will not affect the character of being unconditional
There may be statements added to the instrument but which cannot of the promise or the order.
affect its negotiability and cannot affect the promise or order being
unconditional. THE SUM MUST BE CERTAIN IN MONEY
Relevant provision When is sum considered certain in money?

Sec. 3. When promise is unconditional. - An unqualified order or promise A sum is certain in money if it can be determined on its face or that
to pay is unconditional within the meaning of this Act though coupled which can be computed without resorting to any extrinsic evidence.
with:
Example: “Sum of 1,000,000” – It is determinable but the question is in
(a) An indication of a particular fund out of which reimbursement is
what form is the 1,000,000? You have to indicate whatever the currency
to be made or a particular account to be debited with the amount
is. You have to indicate the full amount including the denomination of
the amount.
(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
Statements added to the instrument which do not affect its
unconditional.
negotiability
There may be statements added to the instrument but which cannot
affect its negotiability and cannot affect the sum being certain in money.
Relevant provision Ex. 48 pesos= 1 dollar, and not just say current rate.
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: PROVISION ON COLLECTION COSTS AND ATTORNEY’S FEES
(a) With interest A provision on collection costs and attorney’s fees may also be added
(b) By stated installments provided that they are only due after the instrument has been due.
(c) By stated installments, with a provision that, upon default in
payment of any installment or of interest, the whole shall become Does it affect the sum being certain in money?
due It does. But the instrument has already become non-negotiable, it being
(d) With exchange, whether at a fixed rate or at the current rate already due. Therefore, it is already irrelevant.
(e) With costs of collection or an attorney's fee, in case payment shall
not be made at maturity. IT MUST BE PAYABLE ON DEMAND OR AT A FIXED
OR DETERMINABLE FUTURE TIME
PROVISION FOR INTEREST
A provision for interest may be added and it cannot also affect the sum PAYABLE ON DEMAND
being certain in money.
Relevant provision
Effect if interest rate is not stated Section 7. When payable on demand. - An instrument is payable on
It is negotiable. A mere phrasing “with interest” is deemed not to affect demand:
the character of the sum. It still renders the sum certain in money.
(a) Where it is expressed or to be payable on demand, or at sight or
Interest, under business transaction, could refer to legal interest. So the on presentation
rate could just be 6%. The requirement of when it is supposed to run (b) In which no time for payment is expressed
starts after the maturity of the instrument. This is still negotiable.
Where an instrument is issued, accepted or indorsed when overdue, it
BY STATED INSTALLMENTS is as regards the person so issuing, accepting or indorsing it, payable on
demand.
A provision that the instrument be payable in stated instalments –
specifying the amount of the instalment and the due date for each Where it is expressed or to be payable on demand, or at sight
instalment. In addition, acceleration clause may be added. or on presentation
If there is a stated installment, it must specify two things: Example: I promise to pay P10,000 on demand.
1. The amount of each installment
2. Due date of each installment TN: “At sight” applies only to Bills of Exchange where there is a drawee.
What about if “through monthly installments, first payment is “At sight” vs. “Upon Presentation”
July 1?”
Some authors would say it complies. Atty. A’s position is that it does not A. Purpose of “at sight” is for it to be presented to the drawee for
comply because the second installment date is not mentioned. They acceptance. When it is accepted by the drawee, that’s when he
just made the inference that when you say monthly, it means the next obliges himself to pay on the instrument.
month. This is not necessarily true. Monthly could actually mean on a
per month basis. This is still not certain. But you can argue both ways. B. “Upon presentation” is for the purpose of payment. It is applicable
to both promissory notes and bill of exchange requiring payment
Acceleration clause from persons primarily liable.
A clause stating that when an obligor defaults on his obligation it would
make the entire obligation due and demandable. It does not affect the In which no time for payment is expressed
negotiability of an instrument. If the instrument does specify a date as to when it is payable, it is
deemed payable on demand
Extension clause
A clause stating that an extension to fulfill the obligation is allowed. Where an instrument is issued, accepted, or indorsed when
overdue, it is as regards the person so issuing, accepting or
Does an extension clause render the instrument non-negotiable? indorsing it, payable on demand.
It depends on whose option the extension is given.
 If the extension is at the option of the holder – whether or not the This is when an instrument is payable on demand only to certain parties.
period is specified, it does not matter. If the holder wants to The type of parties referred to here are “immediate parties”
demand it after 100 years, so be it.
 If it is on the part of the maker – then you have to specify as to Immediate parties – those who are privy to the transactions.
how long because it will render the amount not certain in money
anymore. Example: I promise to pay 1 M to bearer 10 days after Y dies.
PROVISION ON PAYMENT ON CURRENT EXCHANGE RATES X ---- A --- B --- C --- D

7/2 7/15 7/16 7/20
A provision on payment on current exchange rates may also be added
but it has to be made sure what currencies are involved. So you can 7/5 Y dies
provide a current rate, that it presupposes where the instrument will be
drawn and where the instrument will be payable. If you do not know Delivery 10 days after the death of Y
where the instrument drawn, then it would be best if the currency rate When it was delivered on the 15th, it was already demandable but not
be specified. payable on demand because the period has not yet lapsed.
Delivery beyond 10 days from the death of Y (b) On or before a fixed or determinable future time specified
It is only after the 15th that it has already become payable on demand therein; or
because that is when the period has lapsed. That is when the last (c) On or at a fixed period after the occurrence of a specified
paragraph that “the instrument is issued, accepted, or indorsed when it event, which is certain to happen, though the time of
is overdue” only applies. happening be uncertain,
The parties may be knowledgeable about such fact but not automatically An instrument payable upon a contingency is not negotiable, and the
because if this instrument is transferred to C, the word used there is happening of the event does not cure the defect.
indorsed, and the example above is a bearer instrument, that means
you cannot see at the back as to when the instrument was actually Example of payable before a fixed future time
indorsed or when it is transferred.
To Bank A
Beyond 10 days from death, but bearer is without knowledge of death Pay to the order of Floro 30 days before December 25, 2016.
of Y
But, let’s say, it was transferred on the 16th but C does not know Y is Sgd X
already dead. Can you say that the instrument is payable on demand in
relation to C who later transferred on the instrument to D on 7/20? IT MUST BE PAYABLE TO ORDER OR TO BEARER
Ans – No, because C is not an immediate party even if they are actually, PAYABLE TO ORDER
in terms of proximity, very close to B. B, is probably the only one, who
knows that Y has already died on 7/5. So that’s means after 10 days of Relevant provision
his death, payment may already be due, hence can be demanded. Section 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
But because C doesn’t know it, in relation to D, D cannot demand or his order. It may be drawn payable to the order of ----
payment to C right there and then. The instrument as to C, cannot be
considered payable on demand, for the purpose of application of the last (a) A payee who is not maker, drawer, or drawee; or
paragraph of section 7. (b) The drawer or maker; or
(c) The drawee; or
The last paragraph, therefore, tells us that there could be an instance (d) Two or more payees jointly; or
when an instrument is payable on demand only to certain parties. (e) One or more several payees; or
(f) The holder of an office for a time being.
If the instrument was indorsed
It would have been easier if the instrument had been indorsed, because Where the instrument is payable to the order of the payee must be
it is very easy to say that this party is considered an immediate party named or otherwise indicated therein with reasonable certainty.
because you can see the date when it was indorsed.
A payee who is not the maker, drawer or drawee
PAYABLE ON A FIXED FUTURE DATE The payee or that specified person could be another person other than
If it states a fixed future date as to when it is payable. the drawer, maker or drawee.
Payee is not the maker

To Bank A
Payable to Mr. Floro or order 1 M on Dec. 25, 2016
I promise to pay Php 1,000,000 to Y or his order.
Sgd. X Signed, X.
Is the example above even a negotiable? Payee is not the drawer. X is the drawer and A is the drawee. This is
There are two views: (Gray area according to Sir) also an example of an instrument payable to a payee who is neither a
drawer nor a drawee.
1. Can actually be considered a negotiable instrument because while
it is merely an acknowledgment of a debt, but if it contains words
of negotiability, it can be considered a negotiable instrument. To: A
Because for what purpose will you actually inform the bank if not Pay Php 1,000,000 to the order of P.
to demand payment. Signed, X.
2. May not be a negotiable instrument because it does not state a

particular demand. The drawer or maker
TN: But again, because of the words of negotiability, this may be

I promise to pay Php 1,000,000 to X or his order.
considered a negotiable instrument.
Signed, X.
PAYABLE ON A DETERMINABLE FUTURE TIME
To: A
Relevant provision
Pay Php 1,000,000 to the order of X.
Section 4. An instrument is payable at a determinable future time within Signed, X.
the meaning of this Act, which is expressed to be payable ----
(a) At a fixed period after date or sight; or
The drawee not really exist), then it will not become a bearer instrument for failure
to comply with Sec 9c. The intention of the party making or drawing the
To: A instrument matters.
Pay Php 1,000,000 to the order of A.
When this happens, the instrument is not also an order instrument. This
Signed, X. is a non-negotiable instrument because it is neither payable to order nor
bearer. The intent of the drawer of maker is important.
Two or more payees jointly
We emphasize the conjunction which denotes that there are two I promise to pay Php 1M to Superman or order.
separate credits in this case. Signed, X.
To: A
When the name of the payee does not purport to be the name
Pay Php 1,000,000 to the order of P and C.
of any person.
Signed, X.
“Pay to cash” is something which has ripened into a practice that is now
considered acceptable. Supposedly, this should not be a negotiable
One or more several payees instrument because there a no words of negotiability.
We emphasize the conjunction “or”.
Bearer or order are words of negotiability and if you don’t see them
To: A there, then that is not a negotiable instrument. It should apply to “cash”
Pay Php 1,000,000 to the order of P or C. alone and not to any other word which does not purport to be a name
Signed, X. of a person. Sec 9d also contemplates an order instrument but it became
a bearer instrument because you cannot specify who that person is.
Si
The holder of an office for the time being
To: A
The position must be occupied by only one person otherwise it will
Pay to cash Php 1M.
render the payee undeterminable. If it is an order instrument, it is
Signed, X.
required that it must be payable to a payee who is named or indicated
with reasonable certainty.
Name doesn’t purport to be a name of a person.
To: A In this case, the drawer knows that there is no need to make an order;
Pay Php 1,000,000 to the order of the President of the whoever holds the instrument can already demand payment for such an
USC - Lex Circle. instrument.
Signed, X.
Because you made an instrument knowing that it can never indorsed by
Si the order of a person, then there must be intention to deliver that
PAYABLE TO BEARER
instrument solely and whoever holds it will have a right.
Relevant provision
Sec. 9. When payable to bearer. — The instrument is payable to bearer: To: A
(a) When it is expressed to be so payable; or Pay to the King of the Pacific Ocean or order Php 1M.
(b) When it is payable to a person named therein or bearer; or Signed, X.
(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 Take note:
payable; or  “Pay to Bear” will not make the instrument negotiable because of
(d) When the name of the payee does not purport to be the name the lack of the words of negotiability.
of any person; or
(e) When the only or last indorsement is an indorsement in blank.  “Pay to Payroll” is not a negotiable instrument because it will violate
section 1 as it does not contain words of negotiability. The only case
When it is expressed to be so payable decided on the basis of this section is about pay to cash. De Leon is
just making an analogy.
I promise to pay Php 10 to bearer.
Signed, B. Important: A bearer instrument can be negotiated by mere delivery
while an order instrument can be negotiated by indorsement coupled
with delivery.
When it is payable to a person named therein or bearer
Who will endorse here? The bear will not be able to indorse. The
I promise to pay Php 10 to Mr. X or bearer. intention must be for that instrument to be negotiable by mere delivery.
Signed, B.
In all these instances, except for Sec 9 A and B, they are order
instruments but because of certain defects or circumstances, they
When it is payable to the order of a fictitious or non-existing became bearer instruments instead.
person, and such fact was known to the person making it so
payable.
Note that it must be an order instrument and that the maker or drawer
knows that Superman is fictitious or non-existent. If B signed it believing
that Superman really existed (even if we all know that Superman does
When the only or last indorsement is an indorsement in blank. was instructed to apply the proceeds to the loan of Angel with Security
Bank.
A blank indorsement is one which does not specify the person who will
be receiving the instrument. At the back of the instrument, you will see Caltex comes bearing the original securities to inspect and check the
the mere signature of the current holder of the instrument. validity of the time deposits. The bank told them that they already
applied the proceeds to the loan of Angel dela Cruz.
If it is not specific as to whom the instrument will be transferred, the
intention of the party holding the instrument was to transfer it to Caltex filed a case against Security Bank saying that they should pay
anyone. Caltex with the proceeds. The certificates of time deposit were
negotiable instruments and the bank should be liable upon presentation
Pay to A of such.
LC
Caltex want to classify as negotiable? Caltex can claim payment because
Pay to B of the warranty that the maker will pay the holder of the instrument and
A it will not be subject to the defenses of prior parties. Thus, even if
Security Bank says that it already paid the instrument, Caltex now could
Sgd B (indorsed in blank) just make the defense that even if the bank already paid it, they are still
holding the instrument, free from the prior party Angel.
TN: Once a bearer instrument, always a bearer instrument. The example Issues:
above will change the order instrument into a bearer instrument. 1. Whether the certificate of time deposits are negotiable.
2. Whether Security Bank is liable.
How can you convert an order instrument into a bearer instrument? You
indorse it in black. Once indorsed, it will become a bearer instrument. Held:
Even if there is a subsequent special indorsement, it will not change the
nature of the bearer instrument. Whether the certificate of time deposits are negotiable.
Example: (SI = special indorsement, BI= blank indorsement) Yes, because of the words bearer and depositor. The certificates state
“this is to certify that depositor has deposited amount in the bank and
A (SI) – B (SI) – C (BI) – D (SI) – E (SI) – F (BI) – G (SI) – H-I-J we promise to pay bearer or depositor this amount”. If the bank really
wanted to pay Angel only, the bank should have just used Angel dela
In the above example, the last indorsement was made in blank by F to Cruz only and not the words bearer and depositor.
G. If G negotiates it by special indorsement to H, can it still be
considered a bearer instrument? Another important word on the face of the instrument is “repayablee”.
This matters because this should be a promise to pay which means that
There were two blank indorsements with special indorsements in this could be a negotiable instrument.
between. Under the law, only when the last indorsement is in blank will
it convert an order into a bearer instrument. In this case, the last Whether Security Bank is liable
indorsement is special (from G to H). Technically this does not convert
the instrument but because there has been a blank indorsement, H can No. While they are negotiable instruments, Security Bank is not liable.
actually strike out the previous special endorsements and it will be This is because in order for Caltex to receive payment, there should have
considered a bearer instrument. After striking out D, E and G’s been a valid negotiation of a bearer instrument.
indorsement, the last endorsement will be in blank.
Mere delivery would have sufficed but the Caltex officers said that they
Once an instrument is converted to a bearer instrument, it is already a received it as a form of a guaranty so it was not really delivered as a
bearer instrument forever. In this case, H can just deliver it to I and negotiation.
then from I to J.
For the negotiability of the instrument, it is to be ascertained that you
WHERE THE INSTRUMENT IS ADDRESSED TO A DRAWEE, HE were a party to it. At the very least, you should be a holder of the
MUST BE NAMED OR OTHERWISE INDICATED THEREIN instrument. In this case, Caltex cannot be a holder because the
WITH REASONABLE CERTAINTY instrument was just deliver not for purposes of constituting Caltex as
the holder but merely as a guarantee. They cannot assert their right as
This requirement is applicable only to bills of exchange holders.
This is because drawees are present only in bills of exchange. There is
no drawee in a promissory note. TN: This case tells us that you just have to look at the face and the
language used in the instrument to determine its negotiability.
TN: In effect, if it is a bill of exchange and there is no drawee, the
instrument is not negotiable. Philippine Education Co. Inc v. Soriano
Caltex Philippines v. Court of Appeals Facts: Enrique Montinola purchased money orders from Manila Post
Office. He offered to pay a private check but they were not generally
Facts: Angel Dela Cruz was able to get a certificate of time deposit from accepted as payment for money orders according to the teller who
the Security Bank and Trust Company. After, it was alleged that Angel instructed him to see the Chief of the Money Order Division. However,
gave this to Caltex as a guarantee for its purchases from Caltex of fuel Montinola did not go there, instead he managed to leave with the 10
products. money orders and his check.
Angel went back to Security Bank saying that he lost the certificates and On the same day, there was notification to all banks not to receive the
was asking for replacements. After complying with the bank money orders. The Bank of America received the notice three days after.
requirements, he was given replacements. Per his instruction, the bank
One of the money orders was deposited with them and cleared with the cleared the amount hence Golden Savings released the value to Gomez.
Bureau of Posts. Metro Bank’s reason was because it was an accommodation of a valued
client.
The Chief of Money Order Division notified the Bank of America that the
money order had been irregularly issued and in view thereof, the Actually, it was not an accommodation but they were just exasperated
amount it represented had been deducted from the bank’s clearing by Gloria’s repeated demands. After clearing the amount, MB informed
account. The Bank of America wanted the chief to reconsider the Golden Savings that the warrants were not honored by the Bureau of
decision regarding the deduction of the amount from the clearing Treasury. They demanded for a refund for the money it released to
account of the Bank of America but the request was denied hence there Golden Savings. When this was rejected, Metro Bank sued Golden
was an action filed. savings but judgment was rendered in favor of Golden Savings.
The lower court ordered to countermand the notice given to the Bank Issue: Whether the treasury warrants are negotiable instruments.
of America and sided with the bank. It ordered the money division to
reimburse the amount that was credited to the clearing account. Held: No. The treasury warrants, in this case, are said to be non-
negotiable because they are payable out of a particular fund which sets
The Philippine Educators became a party to the case because they a condition to the unconditional promise to pay.
acquired the money orders from Montinola which then deposited them
in the bank. On the face of the instrument, it was stamped “non-negotiable” and that
it is payable out of a particular fund: Fund 501. If you condition the
The bank cleared the amount and it was released to Phil Educators. payment on the existence or sufficiency of the funds, the promise or the
There was however an adverse notice that the money order was stolen order is rendered conditional so it will not comply with Section 1’s
and that the amount cleared would be deducted from the bank’s clearing requirement.
account. The bank complained about the act of the money order
division.
The Supreme Court ruled in favor of Golden Savings. Metrobank was
Issue: Whether the postal money orders were negotiable instruments. negligent in giving Golden Savings the impression that the treasury
warrants were cleared. Without such assurance, Golden Savings could
Held: No. The Supreme Court referred to the US authorities regarding not have made the withdrawals in favor of Gomez.
the value of the money order. Since our laws laws were patterned after
them and the constructions or interpretations made by them are given They also faulted Metro Bank. The signatures of the instrument were
weight. actually forged. The act of Metro Bank was extra-ordinarily carelessness.
They should have waited for the clearance.
In reference to the US decision, they ruled that the government is not
involved in commercial transactions but are merely exercising TWO TYPES OF NEGOTIABLE INSTRUMENTS
governmental power for the benefit of the public. The money orders are
not considered negotiable instruments. TWO GENERAL TYPES OF NEGOTIABLE INSTRUMENTS
1. Promissory note (PN)
An instrument to be negotiable must contain an unconditional promise. 2. Bill of exchange (BOE)
The fact that it is from the government which imposes several
restrictions is contrary to the very nature of a negotiable instrument. TN: Need only to memorize Section 1 in order to know the definitions.
Reasons why postal money orders are not negotiable: Relevant provisions
Sec. 184. Promissory note defined. – A negotiable promissory note
1. The money order was for a public benefit in exercise of a
within the meaning of this Act is an unconditional promise in writing
governmental function and it is not for commercial transactions.
made by one person to another, signed by the maker, engaging to pay
We have said that for an instrument to be negotiable, it must be
on demand, or at a fixed or determinable future time, a sum certain in
used for commercial transactions so sir emphasizes the need to
money to order or to bearer. Where a note is drawn to the maker’s own
include this in the definition of as provided in Section 1
order, it is not complete until indorsed by him.
2. Postal money orders are not unconditional promises because it is
Sec. 126. Bill of exchange defined – A bill of exchange is an
subject to the restriction of not having more than one indorsement.
unconditional order in writing addressed by one person to another,
Further, it is payable only to the person specified because of this,
signed by the person giving it, requiring the person to whom it is
it is not payable to order or bearer.
addressed to pay on demand or at a fixed or determinable future time
a sum certain in money to order or to bearer.
TN: Postal money orders, as they stand now, are not negotiable
instruments.
Parties to a PN and BOE
Metro bank v. Court of Appeals
Promissory Note Bill of Exchange
Facts: Eduardo Gomez had some treasury warrants that were all drawn Maker Drawer
from Philippine Fish Marketing Authority and they were payable to Payee Drawee
Gomez. Some of them were indorsed by their respective payees followed Holder Payee
by Gomez as second indorser. They were indorsed by cashier Gloria of Holder
Golden Savings and deposited in Metrobank.
Who is a holder?
Phil FMA -> Gomez -> Golden Savings -> Metro Bank Person who holds the instrument (may also be a party to the instrument)
Gloria, the employee of Golden Savings was insistent in following-up

whether the treasury warrants were cleared with Metro Bank. The latter
Can a PN be an order instrument? Can a BOE be a bearer AUTHORIZES THE SALE OF COLLATERAL SECURITIES IN CASE THE
instrument? INSTRUMENT BE NOT PAID AT MATURITY
Yes on both. As defined in Section 1, “payable to order or to bearer”.
Initially, the word “order” in the second requirement and the “order” Why will sale of collateral not affect the negotiability of an
mentioned in the 4th requirement are different. instrument?
Because the sale of the collateral happens only after the maturity of the
Even if a BOE is the one referred to as the unconditional order, the instrument. It does not affect the negotiability of the instrument as long
“order” mentioned in section 4 is the order to be made to the payee and as the requisites are still there.
whoever holds that instrument. The “order” under the 2nd requirement
is the order to be made by the drawer of that instrument. If the sale of the collateral happens before the maturity of the
instrument, can it affect the negotiability of the instrument?
CHECKS Yes. It has to happen after, otherwise, the instrument loses its character
of negotiability because said collateral could not be the same as the
Relevant provision amount stated when it is sold and it happens prior to maturity.
Sec. 185. Check defined. – A check is a bill of exchange drawn on a bank Example:
payable on demand. Except as herein otherwise provided, the provisions
of this Act applicable to a bill of exchange payable on demand apply to I promise to pay X or order 1M pesos on Dec. 1, 2016. In case the
a check. instrument is not paid at maturity, he can sell the ring which is
pledged as a security for this instrument.
Is there always a drawee? Sgd. Y
Yes, which is a bank. One of the elements of a bill of exchange is that
“where the instrument is addressed to a drawee, he must be named or
otherwise indicated therein with reasonable certainty.” The drawee here This is negotiable. The additional provision does not affect the
is always a bank, otherwise, it is most likely not a check. negotiability of the instrument because the sale of the collateral will only
happen after maturity.
TERMS, ADDITIONS, OMISSIONS The moment the maturity period has elapsed, the instrument becomes
non-negotiable in its full commercial sense. Thus, any sale of collateral
TERMS WHEN SUFFICIENT thereafter is irrelevant.
When are the terms considered sufficient?
You need not use the terms provided under Sec. 1. You can have your AUTHORIZES A CONFESSION OF JUDGMENT IF THE INSTRUMENT BE
own terms for as long as they have similar phraseology and intent. NOT PAID AT MATURITY
Relevant provision This does not affect the negotiability of the instrument becomes the
confession happens only after the instrument’s maturity.
Sec. 10. Terms, when sufficient. - The instrument need not follow the
language of this Act, but any terms are sufficient which clearly indicate Is confession of judgment illegal?
an intention to conform to the requirements hereof. Confession of judgment as it stands now is illegal according to U.S.
Jurisprudence because it bargains a person’s day in court and right to
ADDITIONS NOT AFFECTING NEGOTIABILITY appeal. However, it does not affect the negotiability of an instrument.
Additions not affecting negotiability Cognovit actionem is valid

Relevant provision You confess guilt on the act alleged. You accept the obligation and
admitted that there was no payment made. You will do this after the
Sec. 5. Additional provisions not affecting negotiability. - An instrument action is filed in court. This is what happens actually during arraignment.
which contains an order or promise to do any act in addition to the You don’t bargain your day in court. You simply give in to the order to
payment of money is not negotiable. But the negotiable character of an save expenses.
instrument otherwise negotiable is not affected by a provision which:
Relicta verification is valid
(a) Authorizes the sale of collateral securities in case the instrument Here, the pleading is being abandoned. A confession of judgment by
be not paid at maturity withdrawal of the defense. This is likewise valid because you do the
same after the action is filed in court.
(b) Authorizes a confession of judgment if the instrument be not
paid at maturity TN: Both happens after the case or action has been filed. The
justification of the Supreme Court in the case of PNB v. Manila Oil will
(c) Waives the benefit of any law intended for the advantage or not apply. You did not bargain your day in court in both instances. After
protection of the obligor all, there is an action filed.
(d) Gives the holder an election to require something to be done in WAIVES THE BENEFIT OF ANY LAW INTENDED FOR THE ADVANTAGE
lieu of payment of money. OR PROTECTION OF THE OBLIGOR
But nothing in this section shall validate any provision or stipulation Example: When the obligor (debtor) waives the benefit of the “No
otherwise illegal. demand, no delay” principle under Obligations and Contracts.
There are additions whereby the maker or drawer uses the instrument
as security or collateral, that doesn’t change the fact that the instrument
remains negotiable.
Example: prima facie to be the true date of the making, drawing, acceptance, or
indorsement, as the case may be.
“I promise to pay A or order 100 pesos on December 1, 2016
without need of demand. Antedating and postdating
A. Antedated – instrument is date earlier than the date of its issuance.
Sgd. Alphonso Floro”
B. Postdated – instrument is dated earlier than the date of its
The abovementioned example is a waiver of the benefit of any law issuance.
intended for the advantage or protection of the obligor.
GR: The antedating or postdating of an instrument will not affect its
GIVES THE HOLDER AN ELECTION TO REQUIRE SOMETHING TO BE validity or negotiability.
DONE IN LIEU OF PAYMENT OF MONEY
XPN: If the antedating or postdating was made for an illegal or
A. If the option is with the holder – the instrument is negotiable fraudulent purpose. Here, the negotiability of the instrument is not
B. If the option is with the promissor – the instrument is non- affected, however, it will invalidate the instrument.
negotiable (because the holder cannot compel him to make
payment in money) TYPES OF HOLDERS
Who are the different types of holders?
OMISSIONS, SEAL, PARTICULAR MONEY 1. Holder in due course
Omissions, seal, particular money not affecting negotiability 2. Holder through a holder in due course
3. Holder not in due course
Relevant provision
Sec. 6. Omissions; seal; particular money. - The validity and negotiable HOLDER IN DUE COURSE
character of an instrument are not affected by the fact that:
HOLDER IN DUE COURSE
(a) It is not dated
(b) Does not specify the value given, or that any value had been Relevant provision
given therefor Sec. 52. What constitutes a holder in due course. – A holder in due
(c) Does not specify the place where it is drawn or the place where it course is a holder who has taken the instrument under the following
is payable conditions:
(d) Bears a seal
(e) Designates a particular kind of current money in which payment (a) That it is complete and regular upon its face
is to be made. (b) That he became the holder of it before it was overdue, and
without notice that it had previously dishonoured, if such was the
But nothing in this section shall alter or repeal any statute requiring in fact
certain cases the nature of the consideration to be stated in the (c) That he took in good faith and for value
instrument. (d) 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
CURRENT MONEY negotiating it.
Refers to the money which can be exchanged in relation to the value of TN: Mnemonics: COFI
the instrument. Simply, it is the exchange rate of the currencies involved
in the transaction. THAT IT IS COMPLETE AND REGULAR UPON ITS FACE
Example: If it says that it is 10, 000 pesos but the parties agreed that A. Complete – when it complied with all the formalities under Sec 1.
they would want dollars instead, even if the exchange rate was not
stipulated there, supposedly, you cannot receive the current money that B. Regular – when the face of the instrument does not give any
you have agreed upon. Still, it will not render the instrument non- doubts as to its authenticity, i.e. erasures, superimpositions and
negotiable because exchange rates are deemed common commercial even blanks.
knowledge under the law. You can refer to the internet or go to the bank
and ask whatever the exchange rate is. TN: “In writing and signed by the maker” – the maker does not need to
be the one to write the instrument; the maker only needs to sign.
OMISSION AS TO THE DATE
Omitted date here refers to the date when the instrument was drawn or THAT HE BECAME THE HOLDER OF IT BEFORE IT WAS OVERDUE, AND
made, and not the date when the instrument is supposed to be paid. WITHOUT NOTICE THAT IT HAD PREVIOUSLY DISHONOURED, IF SUCH
WAS THE FACT
Omission of date will not render the instrument non-negotiable because
dates are essentially not necessary. In fact, date is not an element under When is an instrument overdue?
Section 1. 1. If the time provided already lapsed
(If payable on demand, date of maturity is date of presentment)
Presumption if not dated 2. If an instrument is a promissory note, after the lapse of reasonable
If not dated, the date when the instrument was issued is presumed to time from its date of issuance
be the true date. Presumption is you issued the instrument on the same
day you made it. Ex. I promise to pay X or order 1M. Sgd Y. When is it overdue?
Relevant provision Under Sec 53, if ever the instrument is presented after reasonable
Sec. 11. Date, presumption as to. – Where the instrument or an time reckoned from its issuance date, you will no longer be a
holder in due course.
acceptance or any indorsement thereon is dated, such date is deemed
10 | U N I V E R S I T Y O F S A N C A R L O S
Without notice that it had previously dishonored A. Holder in due course – holds the instrument free from the personal
It is possible that an instrument is dishonoured even before it becomes defenses of prior parties.
overdue, as when there is non-acceptance by a drawee. B. Holder not in due course – holds the instrument not free from any
defenses of prior parties. They are subject to the same defenses
Example: A BoE which is supposed to be presented for acceptance but as if it were non-negotiable.
the drawee does not accept it, even before it reaches the maturity date.
The person who ought to be primarily liable on the instrument will not Relevant provision
pay on the instrument. So there is no person from whom you can Sec. 58. When subject to original defense. - In the hands of any holder
demand. It is deemed dishonored in this case. other than a holder in due course, a negotiable instrument is subject to
the same defenses as if it were non-negotiable. But a holder who derives
THAT HE TOOK IN GOOD FAITH AND FOR VALUE his title through a holder in due course, and who is not himself a party
to any fraud or illegality affecting the instrument, has all the rights of
A. In good faith – simply absence of bad faith. such former holder in respect of all parties prior to the latter.
B. For value – when there is a consideration sufficient to support a
simple contract.
HOLDER THROUGH A HOLDER IN DUE COURSE
Ex. I have an obligation to you worth 10M, it has been 5 years since I HOLDER THROUGH A HOLDER IN DUE COURSE
took the loan. I never paid. All of a sudden I issued a negotiable
instrument, a check worth 1M and you gave me 1 peso. Is that for value? Can a holder not in due course be able to acquire the rights of
a holder in due course and acquire the same status of a holder
Ans – 1 peso is not sufficient to support a simple contract compared to in due course?
the 1M check. Then, it is a case to case basis. Yes, pursuant to the shelter principle (Second sentence of Section 58)
TN: In negotiable instruments law, love is not a sufficient consideration. Relevant provision
THAT AT THE TIME IT WAS NEGOTIATED TO HIM HE HAD NO NOTICE Section 58. But a holder who derives his title through a holder in due
OF ANY INFIRMITY IN THE INSTRUMENT OR DEFECT IN THE TITLE OF course, and who is not himself a party to any fraud or illegality affecting
THE PERSON NEGOTIATING IT. the instrument, has all the rights of such former holder in respect of all
parties prior to the latter.
Infirmity
An instrument worth 100k on its face, but it was written by your friend Example:
whom you know would issue an instrument worth 10k. There was an “M” drafted a BEARER instrument in favor of “P”, “P” Negotiated it to
alteration made in the instrument. Alterations can be considered as an “A” then in the hands of “A”, it was stolen by “X” and was negotiated
infirmity. again by “X” to B, then B negotiated it to C. Eventually C negotiated it
to D.
Defect
1. The instrument was negotiated to a person on account of murder. M ---> P ---> A (stolen by X) ---> X ---> B ---> C ---> D
(This is a defect in the title)
2. When you pay for an instrument worth 1M but you paid for it at
1,000pesos. (This is also a defect in your title) Can D collect from M?
3. When you stole the instrument. (This is the most common case) Yes. D can collect from M. In the absence of any other information in
the given example, a holder is deemed a holder in due course. Thus, he
When notice of infirmity or defect makes one a holder not in is free from any personal defenses of prior parties.
due course
Notice of any defect in the instrument will only affect the status as the If D is not a holder in due course, can he still collect from M?
holder in due course if it is acquired at the time the instrument was Yes. D can still collect provided that he is not party to the fraud or
negotiated. If it is after that, then it will already be irrelevant. illegality (theft) affecting the instrument which caused a defect on the
title. C is presumed to be a holder in due course and D derives this title
HOLDER NOT IN DUE COURSE from C under the Shelter Principle.
HOLDER NOT IN DUE COURSE D is now called a holder through a holder in due course by virtue of the
A holder not in due course is a holder of an instrument where any of the shelter principle. Shelter in the sense that C shelters D. C’s rights thus
four conditions are not met. extend to D.
Sec 53 is just one instance when one is not a holder in due course If C is neither a holder in due course, can D still collect from M?
specifically on an instrument payable on demand. And the reason for No. D cannot collect from M. D having acquired the instrument from C
that is because he failed to comply with the second requirement that he who is not a holder in due course, the shelter principle does not apply.
became the holder of the instrument before it becomes overdue.
D, being a holder not in due course holds the instrument subject to any
Relevant provision defenses of prior parties. Thus, M now can raise defenses.
Sec. 53. When person not deemed holder in due course. - Where an
instrument payable on demand is negotiated on an unreasonable length PRESUMPTION OF HOLDER IN DUE COURSE
of time after its issue, the holder is not deemed a holder in due course. Every holder is deemed prima facie to be a holder in due course.
Distinction between a holder in due course and not a holder in Relevant provision
due course? Sec. 59. Who is deemed holder in due course. - Every holder is deemed
They differ on their rights. prima facie to be a holder in due course; but when it is shown that the
title of any person who has negotiated the instrument was defective,
the burden is on the holder to prove that he or some person under whom This is a personal defense
he claims acquired the title as holder in due course. But the last The fact that it will not avoid the instrument in the hands of a holder in
mentioned rule does not apply in favor of a party who became bound due course tells us that this is a personal defense. Thus, it cannot be
on the instrument prior to the acquisition of such defective title. raised as a defense against him.
When will the presumption not apply? Example:

The presumption that every holder is a holder in due course does not
apply whenever there is any defect in any of the title of the person who I promise to pay P 1 Million to X or order.
negotiated the instrument. It need not be the person from whom he Sgd. Y
acquired it.
Any defect automatically precludes the presumption. Burden of proof is Can date be inserted?
now shifted to the person who claims that he acquired the title as a No. The law only provides for two instances when the date may be
holder in due course. inserted. Here, the instrument is payable on demand. The insertion of
date is not necessary. There is no authority to insert a date.
Important: In order for the shelter principle to apply, the holder does
not have to prove that he is a holder in due course. He just needs to However, you ought to know when the instrument was issued for the
prove that the person from whom he acquired the instrument is a holder computation of reasonable time. This is to know whether or not the
in due course and that he is not a party to any of the defect or the holder is a holder in due course or a holder not in due course. As
illegality or fraud. provided under Section 53.
Does he need to be a party to the defect or mere knowledge Relevant provision

would suffice? Sec. 53. When person not deemed holder in due course. - Where an
Knowledge will not affect the shelter principle. The provision is clear that instrument payable on demand is negotiated on an unreasonable length
“he himself is not a party to any fraud or illegality”. of time after its issue, the holder is not deemed a holder in due course.
DEFECTS OF A NEGOTIABLE INSTRUMENT

I promise to pay P 1 Million to X or order 30 days after date.
Different kinds of defects of a negotiable instrument:
1. Insertion of a wrong date (Personal defense) Sgd. Y
2. Incomplete but undelivered instrument (Personal defense)
3. Incomplete and undelivered instrument (Real defense) Can date be inserted?
4. Complete but undelivered instrument (Personal defense) Yes. This falls under the first instance where date may be inserted. The
5. Forgery of signature (Real defense) instrument is payable at a fixed period after date but was issued
6. Material alteration (Personal defense) undated.
INSERTION OF A WRONG DATE TN: The Instrument is a promissory note thus, there is no need for
acceptance. There is no drawee ordered to pay the payee so no one will
INSERTION OF A WRONG DATE (PERSONAL DEFENSE) accept it.
Relevant provision
POSTDATED ORDER INSTRUMENT
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 Example of postdated order instrument (Scenario 1)
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
I promise to pay P 1 Million to X or order 30 days after date.
acceptance, and the instrument shall be payable accordingly. The
insertion of a wrong date does not avoid the instrument in the hands of
Sgd. Y
a subsequent holder in due course; but as to him, the date so inserted
is to be regarded as the true date.
Flow of the promissory note:
Effect when instrument is not dated YXABCD
The fact that an instrument is not dated does not affect its negotiability.
Besides, the law provides instances when date may be inserted.
Facts: Instrument came from Y. Y issued to X. X issued to A. A inserted
Two instances when date may be inserted July 16, 2016 when the true date is actually July 1, 2016. A negotiated
instrument to B. B issued to C. C indorsed to D. D presented payment
1. When the instrument is payable at a fixed period after date but on July 31, 2016 (30 days after true date so instrument matured)
was issued undated
2. When the instrument is payable at a fixed period after sight but the TN: Facts above apply to all instances under Scenario 1.
acceptance was undated
How to analyze the rights of a holder against prior parties:
TN: The date is inserted not for purposes of making the instrument 1. Determine the type of defect or infirmity
negotiable, but simply to determine its maturity date. 2. Determine the defense applicable (real or personal)
3. Determine the type of holder (HDC, HTHDC, HNDC)
Effect of insertion of a wrong date
Insertion of a wrong date in the instrument will not avoid the instrument
in the hands of a Holder in Due Course, because as to him, the date
inserted in the instrument is the true date.
IN THE HANDS OF A HOLDER IN DUE COURSE Same facts, information available:

D is not a holder in due course.
A. Type of defect – Insertion of a wrong date
B. Defense applicable – Personal defense
If the current holder is not a holder in due course, he can still acquire
C. Type of holder – Holder in due course
the rights of a holder in due course if:
1. The preceding holder is a holder in due course
Rights of D in relation to prior parties (parties prior to the
2. The current holder is not a party to the fraud or illegality
insertion of the wrong date)
1. D can demand payment from Y – The personal defense of an
If the two requirements are complied with, the current holder although
insertion of a wrong date cannot be raised by Y against D as it is
not a holder in due course has all the rights of a holder in due course
not available against a HDC.
under the Shelter Principle and the personal defense is not available
2. D can demand payment from X – same reason.
against him.
Rights of D in relation to subsequent parties
Absent any information about C, C is presumed a holder in due course.
D cannot yet demand payment from B and C. As indorsers, what they
If D is not a party to the fraud or illegality, he is now considered a holder
indorsed as genuine and in all respects what it purports to be is July 16,
through a holder in due course and he has acquired the rights of C who
2016. As to them, they cannot be compelled to pay just yet. They can
is a holder in due course.
only be compelled to pay 30 days after July 16, 2016.
IN THE HANDS OF A HOLDER NOT IN DUE COURSE
TN: Here, B and C negotiated the instrument by indorsement because it
is an order instrument. A. Type of defect – Insertion of a wrong date
Rights of D in relation to the perpetrator of the fraud C. Type of holder – Holder not in due course
D can demand payment from A because A was the perpetrator. He was
the one who inserted the wrong date and committed the fraud. We do Same facts, information available:
not tolerate fraud in any commercial transaction. Both D and C are not holders in due course.
Relevant provisions Since C is not a holder in due course, the Shelter Principle cannot apply.
Sec. 65. Warranty where negotiation by delivery and so forth. — Every
person negotiating an instrument by delivery or by a qualified Rights of D in relation to prior parties
indorsement warrants: 1. D cannot demand payment from Y – Y can raise the personal
(a) That the instrument is genuine and in all respects what it purports defense of insertion of a wrong date as it is available against a
to be holder not in due course.
(b) That he has a good title to it 2. D cannot demand payment from X – same reason.
(c) That all prior parties had capacity to contract
(d) That he has no knowledge of any fact which would impair the Rights of D in relation to subsequent parties
validity of the instrument or render it valueless. D cannot demand payment from B and C – As indorsers, what he
indorsed as genuine and in all respects what it purports to be is July 16,
But when the negotiation is by delivery only, the warranty extends in 2016. As to them, they cannot be compelled to pay just yet. They can
favor no holder other than the immediate transferee. only be compelled to pay 30 days after July 16, 2016.
The provisions of subdivision (c) of this section do not apply to a person Rights of D in relation to the perpetrator of the fraud
negotiating public or corporation securities other than bills and notes. A is ultimately liable as he is the one who caused the fraud and the law
does not tolerate fraud in any commercial transaction.
Sec. 66. Liability of general indorser. - Every indorser who indorses
without qualification, warrants to all subsequent holders in due course: TN: Good faith or bad faith in the insertion of wrong date does not
matter. The law did not distinguish whether it is done in good faith or
(a) The matters and things mentioned in subdivisions (a), (b), and bad.
(c) of the next preceding section
(b) (b) That the instrument is, at the time of his indorsement, valid ANTEDATED ORDER INSTRUMENT
and subsisting; Example of Antedated order instrument (Scenario 2)
And, in addition, he engages that, on due presentment, it shall be I promise to pay P 1 Million to X or order 30 days after date.
accepted or paid, or both, as the case may be, according to its tenor, Sgd. Y
and that if it be dishonored and the necessary proceedings on dishonor
be duly taken, he will pay the amount thereof to the holder, or to any
Flow of the promissory note:
subsequent indorser who may be compelled to pay it.
YXABCD
IN THE HANDS OF A HOLDER THROUGH A HOLDER IN DUE COURSE Facts: Instrument came from Y. Y issued to X. X issued to A. A inserted
A. Type of Defect: Insertion of Wrong Date July 1, 2016 when the true date is actually July 16, 2016. A negotiated
B. Kind of Defense: Personal Defense instrument to B. B issued to C. C indorsed to D. D presented instrument
C. Type of Holder: Holder through a Holder in Due Course for payment on July 31, 2016 (30 days after July 1, the true date as to
D, so instrument matured)
TN: Facts above apply to all instances under Scenario 2.
IN THE HANDS OF A HOLDER IN DUE COURSE Rights of D in relation to the perpetrator of the fraud
A is ultimately liable as he is the one who caused the fraud and the law
A. Type of Defect: Insertion of Wrong Date does not tolerate fraud in any commercial transaction.
B. Kind of Defense: Personal Defense
C. Type of Holder: Holder in due course TN: True date can only apply to a holder in due course. Since this is a
holder not in due course, D can’t rely on the true date. Moreover, D
Rights of D in relation to prior parties (parties prior to the collects from B and C not because the instrument has become due and
insertion of the wrong date) demandable but because they are indorsers and they warrant that the
1. D can demand payment from Y – The personal defense of an instrument is genuine and in all respects what it purports to be dated
insertion of a wrong date cannot be raised by Y against D as it is on July 1,2016.
not available against a HDC. ((Y can’t say to D that the true date
for me is July 16, 2016, so instrument has not yet matured) INCOMPLETE BUT DELIVERED
2. D can demand payment from X – same reason.
INCOMPLETE BUT DELIVERED (PERSONAL DEFENSE)
TN: Y and X are compelled to pay D on July 31,2016 even though in
Relevant provision
fact it is a date earlier than the true date stated by them. This is the
main difference of a negotiable instrument compared to an ordinary Sec. 14. Blanks; when may be filled. - Where the instrument is wanting
instrument. Being negotiable, the holder holds the instrument free in any material particular, the person in possession thereof has a prima
from defenses of prior parties. The remedy of Y and X is to go after A. 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
Rights of D in relation to subsequent parties in order that the paper may be converted into a negotiable instrument
D can compel both B and C to pay. Both took the instrument when it operates as a prima facie authority to fill it up as such for any amount.
was dated July 1, 2016. B and C negotiated instrument by indorsement
because it is an order instrument. As indorsers, they warrant that the In order, however, that any such instrument when completed may be
instrument is genuine and in all respects what it purports to be. 30 days enforced against any person who became a party thereto prior to its
already lapsed after July 1, 2016, thus they can be compelled. completion, it must be filled up strictly in accordance with the authority
given and within a reasonable time. But if any such instrument, after
TN: B and C can be compelled due to Section 65 and 66. Not because completion, is negotiated to a holder in due course, it is valid and
they don’t have a personal defense, but because at the time they took effectual for all purposes in his hands, and he may enforce it as if it had
the instrument, it was already defective (Insertion of a wrong date of been filled up strictly in accordance with the authority given and within
July 1, 2016). Thus, they warrant the instrument as genuine and in all a reasonable time.
respects what it purports to be.
A party has authority to fill in the blanks in the instrument
Rights of D in relation to the perpetrator of the fraud when:
A is ultimately liable as he is the one who caused the fraud and the law 1. The instrument is wanting in any material particular
does not tolerate fraud in any commercial transaction. 2. Person is in possession of a signature on blank paper intended to
be a negotiable instrument
IN THE HANDS OF A HOLDER THROUGH A HOLDER IN DUE COURSE
TN: These 2 instruments in relation to Section 14 are delivered. They
Same rights as a holder in due course if the requirements are complied are presumed to be delivered or negotiated. So we now have an
with (see discussion above) incomplete but delivered instrument.
IN THE HANDS OF A HOLDER NOT IN DUE COURSE The instrument is wanting in any material particular
There is an authority to fill up the instrument with whatever is the
A. Type of defect – Insertion of a wrong date missing material particular.
C. Type of holder – Holder not in due course Signature on blank paper intended to be a negotiable
instrument
Same facts, information available: There is an authority to fill up the instrument with any amount. The
Both D and C are not holders in due course. authority to fill the blanks is only limited to the amount but must be
completed as a negotiable instrument.
Since C is not a holder in due course, the Shelter Principle cannot apply.
TN: The presumption is it is a pro-forma instrument, not just a blank
Rights of D in relation to prior parties paper with signature. It is deemed to be completed as a negotiable
1. D cannot demand payment from Y – Y can raise the personal instrument so all that is to be added is the amount.
defense of insertion of a wrong date as it is available against a
holder not in due course. Requirements for inserting amount
1. Blank paper with signature
2. D cannot demand payment from X – same reason.
2. Intention to make the instrument negotiable
3. Delivery to person other than the drawer or maker
Rights of D in relation to subsequent parties
D can compel both B and C to pay. Both took the instrument when it
This is a personal defense
was dated July 1, 2016. B and C negotiated instrument by indorsement
This can be raised by parties prior to its completion, when what is
because it is an order instrument. As indorsers, they warrant that the
inserted in the incomplete instrument is not what is intended by them
instrument is genuine and in all respects what it purports to be. 30 days
who made it. After the completion of the instrument, whatever is added
already lapsed after July 1, 2016, thus they can be compelled.
is deemed to be added in accordance with the authority given. And when
it is in the hands of a holder in due course, it is valid and effectual for
all purposes.
ILLUSTRATIONS Rights of D in relation to prior parties

TN: In a Bill of Exchange, the person primarily liable is the drawee.
BILL OF EXCHANGE ORDER INSTRUMENT (Scenario 1)
1. E cannot demand payment from A – A has a personal dense of an
To: A July 16, 2016 incomplete but delivered instrument. A can raise it against E who
Pay to X or order P 100,000 on December 1, 2016 with interest of is a holder not in due course.
______. 2. E cannot demand payment from Y – same reason
Sgd. Y 3. E cannot demand payment from X – same reason
Rights of E in relation to subsequent parties

Flow of Bill of Exchange: E can demand payment from both C and D because as indorsers, they
Y  X  B  C  D E warrant that the instrument is genuine and in all respects what it
purports to be.
A
Rights of E in relation to the perpetrator of the fraud
B is ultimately liable as he is the one who caused the fraud and the law
Facts: Instrument was issued by Y to X. Since it’s a Bill of Exchange, Y
does not tolerate fraud in any commercial transaction. Also, B is an
presented the instrument for acceptance to A, A accepted it. X further
indorser who warrant that the instrument is genuine and in all respects
negotiated it to B. B inserted the interest rate of 20% when the true
what it purports to be.
intention of Y is the interest of 2%. B negotiated it to C, and C to D, and
D to E.
BILL OF EXCHANGE BEARER INSTRUMENT (Scenario 2)
TN: Facts above apply to all instances under Scenario 1. To: A July 16, 2016
Pay to X or bearer P 100,000 on December 1, 2016 with interest
IN THE HANDS OF A HOLDER IN DUE COURSE of ______.
Sgd. Y
A. Type of Defect: Incomplete but delivered
C. Type of Holder: Holder in due course Flow of Bill of Exchange:
Y  X  B  C  D E
TN: Absence of any information, there is a presumption that E is a holder
in due course. Therefore, interest as to him is 20%. A
Rights of E in relation to prior parties

Facts: Instrument was issued by Y to X. Since it’s a Bill of Exchange, Y
TN: In a Bill of Exchange, the person primarily liable is the drawee.
presented the instrument for acceptance to A, A accepted it. X further
negotiated it to B. B inserted the interest rate of 20% when the true
1. E can demand payment from A – A cannot raise the defense of
intention of Y is the interest of 2%. B negotiated it to C, and C to D, and
incomplete but delivered against E who is a holder in due course.
D to E.
(primarily liable)
2. E can demand payment from Y – same reason (secondarily liable)
TN: Facts above apply to all instances under Scenario 2.
3. E can demand payment from X – same reason
Important: When a bearer instrument is delivered, the warranty
extends to the immediate transferee only.
E can demand payment from both C and D because as indorsers, they
warrant that the instrument is genuine and in all respects what it
Reason: If it is a bearer instrument, one would not know who the parties
purports to be.
to the instrument are. The only known persons are the person primarily
liable (the one who will accept instrument), and the person who
Rights of E in relation to the perpetrator of the fraud
negotiated the instrument to you.
B is ultimately liable as he is the one who caused the fraud and the law
does not tolerate fraud in any commercial transaction. Also, B is an
Relevant provision
what it purports to be. Sec. 65. Warranty where negotiation by delivery and so forth. — Every
person negotiating an instrument by delivery or by a qualified
IN THE HANDS OF A HOLDER THROUGH A HOLDER IN DUE COURSE indorsement warrants:
(a) That the instrument is genuine and in all respects what it purports
Same rights as a holder in due course if the requirements are complied to be
with (see discussion above). (b) That he has a good title to it
(c) That all prior parties had capacity to contract
IN THE HANDS OF A HOLDER NOT IN DUE COURSE (d) That he has no knowledge of any fact which would impair the
validity of the instrument or render it valueless.
A. Type of defect – Incomplete but delivered
B. Defense applicable – Personal defense But when the negotiation is by delivery only, the warranty extends in
C. Type of holder – Holder not in due course favor no holder other than the immediate transferee.
Same facts, information available: IN THE HANDS OF A HOLDER IN DUE COURSE

Both E and D are not holders in due course. Since D is not a holder in
due course, the Shelter Principle cannot apply. A. Type of Defect: Incomplete but delivered
C. Type of Holder: Holder in due course
Rights of E in relation to prior parties ILLUSTRATIONS

1. E cannot demand payment from Y, X and A.
PROMISSORY NOTE ORDER INSTRUMENT
I promise to pay X or his order _______.
1. E can demand payment from D – D as an immediate transferee Sgd Y.
warrants that the instrument is genuine and in all respects what it
purports to be. Flow of Promissory note:
2. E cannot demand payment from C – C is not an immediate YXCAB
transferee. C did not warrant that the instrument is genuine and in
all respects what it purports to be. Placed P1M
Rights of E in relation to the perpetrator of the fraud Facts: An instrument was made by Y in favor of X, which was stolen by
B is ultimately liable as he is the one who caused the fraud and the law C before delivery was made. C thereafter placed an amount of 1M and
does not tolerate fraud in any commercial transaction. Also, B is an indorsed it to A who indorsed it to B.
what it purports to be. Rights of B in relation to prior parties
Y cannot be held liable because it is a real defense and because it is
INCOMPLETE AND UNDELIVERED INSTRUMENT such, it can be raised as a defense against those who are holders in due
course and holders not in due course.
INCOMPLETE AND UNDELIVERED (REAL DEFENSE)
Rights of B in relation to subsequent parties
Relevant provision A can be held liable because as an indorser, he warrants that:
Sec. 15. Incomplete instrument not delivered. – Where an incomplete 1. The instrument is genuine and in all respects what it purports to
instrument has not been delivered, it will not, if completed and be
negotiated without authority, be a valid contract in the hands of any 2. He has good title to it
holder, as against any person whose signature was placed thereon
before delivery. Rights of B in relation to the perpetrator of fraud
C will be liable as the perpetrator. We do not tolerate fraud in
This is a real defense commercial transactions. He is also liable as an indorser because as an
Real defense because it mentions that it will not be a valid contract in indorser he warrants that the instrument is genuine and that he has
the hands of any holder (including holders in due course). good title to it.
How will it affect the rights of the parties: Rights of B in relation to the one whose signature was forged
X will not be held liable because he is not a party to the instrument. But,
HOLDER IN DUE COURSE if he is pursued by B, he can raise the defense that the instrument was
incomplete and undelivered. After all, he was not a party to the
A. Prior parties – Not liable negotiable instrument. You can only go after parties to the instrument
B. Subsequent parties
BILL OF EXCHANGE BEARER INSTRUMENT
1. Indorsers – liable because they warrant that the instrument is
genuine and in all respects what it purports to be AND they To: B July 16, 2016
also warrant that they have good title to it. Pay to X or bearer P 100,000 on December 1, 2016.
2. Person negotiating by delivery – liable if immediate transferor Sgd. Y
because the warranty that the instrument is genuine and in
all respects what it purports to be and that he has a genuine
title over it only extends to the immediate transferee (current Flow of Bill of Exchange
holder). YXAFECD
3. Perpetrator – liable because we do not tolerate fraud in any
commercial transactions. B Placed P1M
HOLDER THROUGH A HOLDER IN DUE COURSE Facts: Y made instrument in favour of X, X presented instrument to B
for acceptance and was returned to X. X further negotiated the
Same rules apply because he gets whatever rights the holder in due
instrument to A and while in the hands of A, the said instrument was
course have. (shelter principle)
stolen by F who wrote the amount of 1M and delivered the instrument
E. But before it was stolen by F, the said instrument was already signed
HOLDER NOT IN DUE COURSE
by A. F delivered instrument to E then delivered it to C then to D.
Same rules apply because this is a real defense.
Rights of D in relation to the drawee, B (primarily liable)
What warranties are violated by the indorser if the instrument B cannot be held liable because he can set up the real defense of
is not delivered? (SEC. 65 (b)) incomplete but undelivered instrument.
(b) That he has a good title to it
Rights of D in relation to prior parties
TN: In addition to the warranty that the instrument is genuine and in all Parties prior to the defect cannot be held liable because they are not
respects what it purports to be, they also violate the warranty that they precluded from raising the real defense of an incomplete but an
have a good title to it. Thus, if the issue is incomplete and undelivered undelivered instrument. In addition, Y, X and A did not make a warranty.
instrument, it is not enough that the warranty violated is the
genuineness of the instrument. You must also mention that the warranty
of having a good title to it is being violated.
Rights of D in relation to subsequent parties Relevant Provision

1. C is liable because he is an immediate transferor. When he Sec. 16 – “But where the instrument is in the hands of a holder in due
delivered the instrument to D, he warranted that the instrument is course, a valid delivery thereof by all parties prior to him so as to make
(a) genuine and in all respects what it purports to be and that (b) them liable to him is conclusively presumed.”
he has a good title to it.
In the hands of a holder not in due course
2. E is not liable because his warranty only extends to C. The presumption of delivery is rebuttable.
Rights of D in relation to the perpetrator of fraud Relevant Provision
F is liable because he is the perpetrator, we do not tolerate fraud in Sec. 16 – “And where the instrument is no longer in the possession of a
commercial transactions. party whose signature appears thereon, a valid and intentional delivery
by him is presumed until the contrary is proved.”
COMPLETE BUT UNDELIVERED INSTRUMENT
Q. If the instrument is in the hands of a holder not in due course, what
COMPLETE BUT UNDELIVERED (PERSONAL DEFENSE) can be shown by a person who may be required to pay?
1. Show that there was no authority to deliver (No delivery)
Relevant provision 2. If there was delivery, such delivery was conditional or for a special
Sec. 16. Delivery; when effectual; when presumed. - Every contract on purpose
a negotiable instrument is incomplete and revocable until delivery of the
instrument for the purpose of giving effect thereto. As between Relevant provision
immediate parties and as regards a remote party other than a holder in “As between immediate parties and as regards a remote party other
due course, the delivery, in order to be effectual, must be made either than a holder in due course, the delivery, in order to be effectual, must
by or under the authority of the party making, drawing, accepting, or be made either by or under the authority of the party making, drawing,
indorsing, as the case may be; and, in such case, the delivery may be accepting, or indorsing, as the case may be; and, in such case, the
shown to have been conditional, or for a special purpose only, and not delivery may be shown to have been conditional, or for a special purpose
for the purpose of transferring the property in the instrument. 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 CONDITIONAL AND SPECIAL DELIVERY
to him is conclusively presumed. And where the instrument is no longer
in the possession of a party whose signature appears thereon, a valid CONDITIONAL AND SPECIAL DELIVERY
and intentional delivery by him is presumed until the contrary is proved.
1. For conditional delivery – Conditional delivery is one where
How will it affect the rights of the parties: there is an authority to deliver, however, it is subject to a
condition.
HOLDER IN DUE COURSE
Example: The maker issued an instrument in favor of A subject to
A. Prior parties – Liable because they cannot raise the personal the condition that A should pass the bar exams.
defense of a complete but undelivered instrument.
B. Subsequent parties TN: The condition must not be stated in the negotiable instrument
1. Indorsers – Liable because they warrant that they hold good otherwise it will place a condition on the negotiable instrument
title to the instrument making it non-negotiable.
2. PNBD – Liable if he is the immediate transferor
3. Perpetrator – Liable because theft is punishable by law 2. For special purpose
HOLDER THROUGH A HOLDER IN DUE COURSE Example: M is the maker. He kept it in his drawer. M gave X the
Same rules as the HDC by virtue of the shelter principle, which provides authority to give the instrument to A for safekeeping.
that he acquires the right of a HDC.
ILLUSTRATIONS
A. Prior parties – Not liable because they can set up a personal BILL OF EXCHANGE BEARER INSTRUMENT
defense of complete but undelivered.
B. Subsequent parties – same rules as HDC To: A July 16, 2016
1. Indorsers – Liable because they warrant that they hold good Pay to X or bearer P 10,000 on December 1, 2016.
title to the instrument Sgd. Y
2. PNBD – Liable if he is the immediate transferor
3. Perpetrator – Liable because theft is punishable by law
Flow of Bill of Exchange
YXBCD
PRESUMPTION ON DELIVERY
A
PRESUMPTION ON DELIVERY
In the hands of a holder in due course Facts: The instrument is in the hands of Y and was stolen by X. It was
presented to A for acceptance and was returned to X, X subsequently
There is conclusive presumption of delivery. It cannot be rebutted by
negotiated the instrument to B, C then D.
any evidence to the contrary. The issue of non-delivery cannot be raised
because it is a personal defense – that which you cannot raise against
Rights of D in relation to the one who stole the instrument
a holder in due course.
X is liable because the law penalizes theft.
Rights of D in relation to subsequent parties the party against whom it is sought to enforce such right is precluded
1. C is liable because he is the immediate transferor from setting up the forgery or want of authority.
2. A is liable because the defense of complete but undelivered
instrument cannot be raised against D who is a holder in due Forgery defined
course. Counterfeiting or making alterations to the instrument with the intent to
defraud.
Relevant provision
Sec. 62. Liability of acceptor. - The acceptor, by accepting the Section 23 only pertains to forgery of the signature.
instrument, engages that he will pay it according to the tenor of his Thus, if there is alteration in the amount and there is intent to defraud,
acceptance and admits: it cannot be considered as forgery in relation to Sec 23 but it could be
(a) The existence of the drawer, the genuineness of his signature, forgery in relation to NIL.
and his capacity and authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse. FORMS OF FORGERY COVERED UNDER SEC 23
BILL OF EXCHANGE ORDER INSTRUMENT FORMS OF FORGERY COVERED UNDER SECTION 23
1. Fraud in factum or fraud in esse contractus (Fraud amounting

To: A July 16, 2016 to forgery) – Where the party makes it appear that there was
Pay to X or bearer P 10,000 on December 1, 2016. intention to issue a negotiable instrument through the signature of
Sgd. Y another person. Here, there really was no intention to issue a
negotiable instrument, but there is a person who makes it appear
that there is a negotiable instrument.
Flow of Bill of Exchange
YXBCD
Example: You brought with you a blank piece of paper and asked
Kobe Bryant to sign the paper. When you returned home, you wrote
A
on the piece of paper:
Facts: The instrument is in the hands of Y and was stolen by X. It was
presented to A for acceptance and was returned to X, X subsequently “I promise to pay Mr. Divinagracia 1M pesos.
negotiated the instrument to B, C then D.
Love lots,
HOLDER IN DUE COURSE Kobe Bryant.”
Rights of D in relation to prior parties There really was no intention on the part of Kobe Bryant to issue a
Y is liable because he cannot raise the personal defense of a complete negotiable instrument, but Charles made it appear that it was the
but undelivered instrument against a holder in due course. intention of Kobe Bryant to issue a negotiable instrument.
Rights of D in relation to subsequent parties Will Sec 14 apply in that case—incomplete but delivered instrument?
B and C will be liable because they warrant that they have a good title No, because the signature was for autograph purposes and not to
to the instrument. issue a negotiable instrument. Section 14 is only applicable in issuing
a negotiable instrument.
X can be held liable because theft is punishable under the law 2. Duress amounting to forgery – When one is forced to sign
instrument out of force, threat, undue influence etc.
Example: Pearl was held at gunpoint by Mr. Cabatana and so Charles
Rights of D in relation to subsequent parties was forced to issue a negotiable instrument.
1. A is liable because he cannot raise the personal defense of a
complete but undelivered instrument 3. Fraudulent Impersonation – When the person issued a
2. B and C are liable because as indorsers they warrant that they have negotiable instrument by being made to believe that the person
a good title to it asking for the negotiable instrument is the person whom he really
intends to issue a negotiable instrument.
Y is not liable because he can raise the personal defense of a complete Example: You look to your left and thought you saw Scarlet
but undelivered instrument. Johansson, the person in your left (Tess Tan) made it seem that
she is Scarlet Johansson.
X can be held liable because theft is punishable under the law. This is an example of fraudulent impersonation because there was
really an intent to issue a negotiable instrument, but not to Tess,
rather to Scarlet Johansson. However, if Charles really knew that
FORGERY Tess is not Scarlet Johansson, then there is no fraudulent
FORGERY (REAL DEFENSE) impersonation.
Relevant provision FRAUD NOT CONSIDERED FORGERY UNDER SECTION 23:

Sec. 23. Forged signature; effect of. - When a signature is forged or 1. Fraud in inducement – When there is an intention to sign a
made without the authority of the person whose signature it purports to negotiable instrument but for a different consideration.
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
Example: Kobe Bryant intended to issue a negotiable instrument in B. Subsequent parties

favour of Mr. Divinagracia because the latter is said to be selling
authentic Jordan shoes. It turned out that the pair is not authentic. 1. Acceptor – Not liable because he only warrants the
genuineness of the drawer’s signature and not the indorser.
In that case, there is only fraud in inducement because there was 2. Indorsers subsequent to the forgery – liable because they
really an intention to issue a negotiable instrument. warrant that the instrument is genuine and in all respects
what it purports to be
TN: Look at the intention of the parties. 3. PNBD – liable if immediate transferor because he warrants
A. If the intention is to make a negotiable instrument – fraud in that the instrument is genuine and in all respects what it
inducement purports to be.
B. If there is no intention – Fraud in Factum or Fraud in esse 4. Forger – liable because forgery is penalized by law
contractus or fraud amounting to forgery
MCQ Question: BILL OF EXCHANGE

Which of the following is not a real defense?
A. Fraud in factum Signature of the drawer is forged
B. Fraud in esse contractus
C. Fraud amounting to forgery A. Prior party (drawer) – not liable because the real defense of
D. Fraud in inducement forgery can be raised.
EFFECTS OF FORGERY B. Subsequent parties

1. Acceptor – liable (because he warrants the genuineness of
EFFECTS OF FORGERY the signature of the drawer)
1. Only the signature is inoperative and not the entire instrument 2. Indorser – liable because they warrant that the instrument
2. It cuts off the liabilities of the parties prior to the forgery is genuine and in all respects what it purports to be
3. Subsequent parties cannot have the right to retain the instrument 3. PNBD – liable if immediate transferor because he warrants
4. There is no right to discharge therefore to the immediate transferee that it is genuine and in all
5. No right to enforce payment thereof against any parties prior respects what it purports to be
thereto 4. Forger – liable because forgery is penalized under the law
RULES IN RELATION TO FORGERY Signature of Indorser is forged
Take note: Forgery is a real defense because it mentions any party. A. Prior parties
Also, being a real defense, the status of the holder is immaterial, unless
other defenses (personal) are also available. Thus, the rules below apply 1. Order instrument – not liable because they can raise the real
to all types of holder – HDC, HTHDC, HNDC. defense of forgery
2. Bearer instrument– liable because the forged indorsement is
PROMISSORY NOTE not necessary to the title of a HDC or to any holder for that
matter.
Signature of the Maker is forged
TN: When you forge the signature of the indorser in a bearer
A. Prior party (maker) – he is not liable because he can raise the real instrument, it will not affect the nature of the instrument
defense of forgery being a bearer instrument. It can always be negotiated by
mere delivery. Thus, all prior parties may be held liable as
B. Subsequent parties – forgery is irrelevant in a bearer instrument.
1. Indorser – liable because they warrant that the instrument is
genuine and in all respects what it purports to be B. Subsequent parties
2. PNBD – liable if immediate transferor because he warrants to 1. Acceptor – Not liable because he only warrants the
the immediate transferee that it is genuine and in all respects genuineness of the drawer’s signature and not the indorser.
what it purports to be 2. Indorsers subsequent to the forgery – liable because they
3. Forger – liable because forgery is penalized under the law warrant that the instrument is genuine and in all respects
what it purports to be
Signature of Indorser is forged 3. PNBD – liable if immediate transferor because he warrants
that the instrument is genuine and in all respects what it
A. Prior parties purports to be.
1. Order instrument – not liable because they can raise the real 4. Forger – liable because forgery is penalized by law
defense of forgery
2. Bearer instrument– liable because the forged indorsement is
not necessary to the title of a HDC or to any holder for that
matter.
TN: When you forge the signature of the indorser in a bearer

instrument, it will not affect the nature of the instrument
being a bearer instrument. It can always be negotiated by
mere delivery. Thus, all prior parties may be held liable as
forgery is irrelevant in a bearer instrument.
Rights of B in relation to the forger

ILLUSTRATIONS
F is liable because he is a forger and should be penalized under the law
PROMISSORY NOTE BEARER INSTRUMENT
TN: Same rule applies if B is a HTHDC or a HNDC because it is a real
defense.
I promise to pay X or bearer P10,000.
Sgd. T PN BEARER INSTRUMENT WITH TWO DEFECTS
Flow of Promissory note Instrument: Promissory Note; Payable to Bearer

TFXABC Holder: Not in due course
Defects: Forgery of signature of indorser and complete but undelivered
Forged T’s signature instrument
Facts: T’s signature was forged by F before it was delivered to X. X

negotiated the instrument to B, B then to C.
Rights of C in relation to prior parties

T is not liable because he can raise the real defense of forgery.
Rights of C in relation to subsequent parties

1. B is liable because he is the immediate transferor. C can only go Facts: You have a promissory note payable to bearer, signed by M in
after B because B is the immediate transferor and he warrants that favor of P who delivered the instrument to A. In the hands of A, the
the instrument is genuine and in all respect what it purports to be. instrument was stolen by F who forged the signature of A for whatever
purposes it is necessary. The instrument was delivered to B, then to C,
2. X and A are not liable because they did not make the same then to D who knew about the forgery. C also knows about the forgery.
warranty to C.
Discuss the rights of D.
Rights of C in relation to the forger This is a bearer instrument, thus, indorsement is not necessary. The
F, the forger is liable because forgery is penalized current holder is a mere holder not in due course. The defects are
forgery and complete but undelivered instrument.
Flow of Promissory note Rights of D in relation to prior parties (M and P)

TXAFBCD
1. M cannot be held liable to D. Supposedly, M can be held liable
Forged A’s signature because forgery cannot be raised as a defense as indorsement is
not necessary to the title of D. However, M can raise another
Facts: What if the forgery happens in the hands of A. The bearer defense—the personal defense of a complete but undelivered
instrument was signed by T, negotiated to X then negotiated to A. It instrument.
was then stolen by F, then negotiated to B, C then D. 2. P cannot be held liable to D. P is not the immediate transferor.
Since this is a bearer instrument, D can only go after prior parties
Rights of D in relation to prior parties other than the person primarily liable if he happens to be the
1. T is primary liable because it is a bearer instrument and the immediate transferor, which P is not to D.
signature of the indorser is not necessary.
2. X is not liable because this is a bearer instrument and he is not the TN: P will not be held liable only in relation to D, but if D collects
immediate transferor. payment from C, who in turn collects from B, then to A, A will now collect
3. A is not liable because it was him whose instrument was stolen, from P. P, in this sense, will still be liable.
but if we follow the law, it seems that A can be liable in a bearer
instrument because he allowed the instrument to be stolen. But TN: This is the exception to the general rule that supposedly, if there is
there are authors who would say that the person to whom the forgery in the signature of the indorser, prior parties should not have
instrument was stolen should not be held liable. been liable as they can raise the defense of forgery. More so because
this is a bearer instrument and indorsement is not necessary to the title
TN: If it is a bearer instrument, you can only go after the person of the current holder.
primarily liable, the immediate transferor and the forger.
Rights of D in relation to the immediate transferor
PROMISSORY NOTE ORDER INSTRUMENT C can be held liable since he is the immediate transferor. It is only him
who warrants to D that the instrument is genuine and in all respects
Rights of C in relation to subsequent parties what it purports to be, and that he holds good title to it.
All the indorsers will be liable because as indorsers they warrant that
the instrument is genuine and in all respect what it purports to be. Rights of D in relation to the forger
Ultimately, F can be held liable because he is the forger. Forgey is
Rights of B in relation to prior parties punishable by law.
1. T is not liable because it can raise the defense of forgery
2. X and A cannot be liable because they can raise the real defense Summary:
of forgery Holder D can only go to C, immediate transferor, and F who is ultimately
liable.
Rights of B in relation to subsequent parties
B and C are liable because as indorsers, they warrant that the instrument
is genuine and in all respects what it purports to be
PN BEARER INSTRUMENT WITH TWO DEFECTS favor of Concepcion Emergency Hospital. However, they found out that
the hospital did not receive the amounts covered by the check.
Instrument: Promissory Note; Payable to Bearer
Holder: Holder through a holder in due course The Province of Tarlac (drawer) purportedly issued a check in favor of
Defects: Forgery of signature of indorser and complete but undelivered Concepcion Emergency (payee). Supposedly, the check is to be
instrument accepted by PNB (drawee). In the hands of Concepcion Emergency, the
Defense: Real defense instrument was delivered to Fausto Pangilinan, the administrative officer
and cashier of payee hospital, who forged the signature of the Director
of Concepcion Emergency and negotiated the instrument to the
Associated Bank (collecting bank). Associated Bank indorsed the check
to PNB.
Issue: Who among the parties will bear the risk of loss due to forgery?
Held: The Associated Bank shall bear 50% and the Province of Tarlac
shall also bear 50%.
Facts: Same facts but C is a HDC. Applying the shelter principle, D can
be considered a HTHDC; personal defenses cannot be raised against him
Liability as an indorser and as a collecting bank
since he acquires the rights of a HDC.
Associated Bank, as an indorser, is liable because it warrants the
genuineness of the instrument and in all respects what it purports to be.
More importantly, as the collecting bank, it warrants all prior
1. M can be held liable. The defect is that it is complete but
indorsements. It cannot claim that the instrument was forged as a
undelivered instrument, at the same time, there is forgery. M can
general rule. If there is a forgery in the signature of the indorser, the
supposedly raise the personal defense that it was complete but
drawee bank should not be held liable. The drawer is also not liable
undelivered against a HNDC. However, M cannot raise the same
being a prior party. Subsequent parties are liable.
against D who is now a HTHDC. Moreover, indorsement is not
necessary to the title of D so defense of forgery of the signature of
This case is an exception. In case of holding Associated Bank as solely
an indorser is not also available.
responsible for the loss, it also took into consideration the negligence of
2. As regards other parties, the same rules as the previous example
the Province of Tarlac.
applies (See HNDC, defect of forgery and complete but undelivered
instrument).
Drawer is liable when he is guilty of negligence by allowing the
fraud to happen
The only thing that will change if you have a HTHDC or HDC as opposed
The drawer, Province of Tarlac, is liable because it is guilty of
to a HNDC and if you have a bearer instrument and the defect is forgery
contributory negligence. It allowed Faustino, who already retired for
to the signature of the indorser is that the person primarily liable, M in
three years and who was no longer connected to the hospital, to collect
the instance case, can be held liable.
the checks. It is precluded from raising the defense of forgery, being a
negligent party.
Summary:
D can collect from M C and F who is ultimately liable.
Drawee is not liable
PNB is not liable. It’s just that since it already debited the account of
PERSONS LIABLE IN FORGERY
Province of Tarlac, it is made to reimburse the Province of Tarlac for
Parties subsequent to the forgery can be held liable because of certain
50% since the liability of the latter is only 50%. Another 50% must be
warranties. Parties prior to the forgery are not liable, unless, they are
collected from Associated Bank.
precluded from raising the defense of forgery.
Q. In what instance where bank is liable even if there is
Prior parties precluded from raising the defense of forgery
forgery?
1. Parties in estoppel – those who by their acts, silence or negligence
are estopped from setting up the defense of forgery.
Rules in clearing
2. Acceptors if there is forgery in the drawer’s signature – also by
Bank can be held liable when they violate the 24-hour clearing
estoppels because they made a warranty that the signature is
regulations under the Philippine Clearing House Corporation and under
genuine
Central Bank Circular.
3. Prior parties in relation to a bearer instrument
4. Negligent party
The reasons for this are to assure that there is sufficiency of funds and
to allow the collecting bank to go after the forger. It could happen that
CASES the bank has not yet allowed the encashment.
FORGERY OF AN INDORSEMENT IN AN ORDER INSTRUMENT
This rule was not applied in this case because even if PNB informed
Associated Bank within 24 hours from knowing that there was forgery,
Associated Bank v. CA
Associated Bank could not have gone after the forger still. At that time,
Pangilinan’s account was already depleted. The spirit of the regulation
would have been rendered useless.
Atty. Amago: This is something unusual. PNB should have also been
liable with the sharing 50, 20 and 30% because they did not comply
with the 24-hour regulation. For exam purposes, a bank can be held
liable if they failed to comply with the 24-hour clearing regulation and
Facts: The Province of Tarlac maintains a current account with PNB this is an instance when it is precluded from raising the defense of
forgery.
where the provincial funds are deposited. They issue several checks in
FORGERY OF DRAWER’S SIGNATURE do not possess the preternatural gift of cognition as to the
evil that may lurk within the hearts and minds of their
Samsung Construction v. FEBTC employees. (emphasis by Amago on the Bold Words)
Facts: We have Just because your employee is the one who committed the fraud or
one check forgery that does not automatically mean that the employer is negligent.
(owned by The SC even stated that even if you placed the check on your table, that
Samsung, signed bare fact does not in itself prove negligence.
by Jong) to be
presented to FEBTC (drawee bank) by Gonzaga (the payee). The check Furthermore, Samsung in this case presented the procedures they
which was presented had the forged signature of Jong who was the employed to safeguard their checks while FEBTC did not even submit
signatory of Samsung. This check was claimed in the hands of Mr. Kyu. what kind of diligence had to be observed by Samsung (drawer) in this
Gonzaga (payee) took hold of one of the checks of Samsung purportedly case.
bearing the signature of Jong who went to FEBTC. FEBTC considered
the check as valid since it bore the signature of Mr. Jong. Therefore there was no negligence on the part of the drawer, and the
general rule stands: The drawer should not be liable for the forgery of
However, since the amount exceeded P100, 000, the approval of their own signature, but the drawee, who warranted the genuineness of
Samsung officers was required. FEBTC presented the check to Ms. Velez, the check, who should be liable.
Senior Assistant Cashier, who tried to call Mr. Jong. They were not able
to reach Mr. Jong, nonetheless, Ms. Velez considered the instrument as FORGERY OF PAYEE’S SIGNATURE
one which bore the genuine signature of Mr. Jong.
Gempesaw v. CA
The check was transferred to Syfu, another officer of Samsung, who
took hold of the check. She then saw Sempio, the assistant accountant
of Samsung, and asked him about the signature on the check. Sempio
confirmed the signature. The check was for the purchase of equipment.
Held: The party that should be liable is the drawee because the latter
warrants the genuineness of the signature of the drawer absent the fact
that the drawer is negligent, and the mere fact that the employee of the Facts: Gempesaw signed the check prepared by Alicia Galang along
drawer was the forger, does not mean that the drawer is negligent since with the vouchers. The check is payable to various suppliers (payees of
the latter do not possess the preternatural gift of cognition as to the evil the check). The check was forged—signature of the payees were forged
that may lurk within the hearts and minds of their employees. in favor of Alicia Galang.
The GENERAL RULE is being applied here. The drawee-acceptor is liable Gempesaw was a businessman who had several grocery stores. He had
in this case because the forgery is in the signature of the drawer. As a a bookkeeper named Alicia Galang whom he trusted that every time
rule, being the drawee-acceptor, you warrant the genuineness of the Gempesaw had transactions, all he did was sign a check and give it to
signature of the drawer. Galang, entrusting her with it.
An EXCEPTION is when the drawer, instead of the drawee, will be held After two years, Gempesaw found out with the bank that there were
several withdrawals from his account which he did not approve. There
liable if the drawee can prove that the drawer was negligent in this case
(similar to the case of Gempesaw). were 82 checks which were more than the amount of the obligations
that were cleared and paid by the banks to the indorsee.
FIRST PREMISE:
Gempesaw asked the bank to reimburse him with those amounts that
If there is forgery, it has to be proven first. were not authorized to be withdrawn from his account, so Gempesaw
Samsung alleged that there was forgery. On the other hand, FEBTC sued the bank for the amount
denied there was forgery.
The encashment was made as follows:
Samsung presented NBI as an expert, while FEBTC presented PNP as an
expert. RTC believed NBI over PNP, and SC affirmed that the NBI is Alicia Galang went to Mr. Boon, chief accountant of the drawee bank. In
more experienced in the field of forgery detection. accordance with the internal rules of the PBC, only the branch manager
should accept a check if there is a second indorsement.
Furthermore (and more importantly since emphasized by sir), Mr. Jong
himself stated that the signature in the check was indeed forged. While Since there is forgery in the signature of the indorsers (payees), the rule
is:
it is self-serving for Mr. Jong to state that his signature was forged, the
SC stated that he had to be believed because if there was any person
If there is forgery in the signature of the indorsers, only
to say if there was forgery, it should have been the owner of the
signature being forged. Therefore, there is indeed forgery in this case. subsequent indorsers are liable to the current holder of the
instrument. Drawee acceptor is not liable; Drawer is also not
SECOND PREMISE: liable.
Now that there is forgery, the drawer had to be proven to be
negligent for the drawee not to be liable. Held: Galang is not the only one liable. Drawee bank is also liable
because of contributory negligence. Both must be liable 50-50.
In this case, Samsung was NOT liable because:
Gempesaw – she just allowed Galang to prepare, encash the check,
The bare fact that the forgery was committed by an employee of along with the supporting documents, without even checking it. It took
the party whose signature was forged cannot necessarily imply that her 2 years to check on the bank statements, even if these bank
such party’s negligence was the cause for the forgery. Employers statements were given to her on a monthly basis.
GR: Negligent persons are one of those parties precluded from using the MATERIAL ALTERATION
defense of forgery. It is any alteration which changes the liability of a party. If the
modification and alteration in the check number will not affect the
Drawee bank (PBC) – Considered as negligent for having violated its liability of any party, it is not deemed a material alteration.
own internal rules. It should not have been Mr. Boon who accepted the
check but it should have been the branch manager. Relevant Codal Provision
Sec. 125. What constitutes a material alteration – Any alteration which
FORGERY OF INDORSER’S SIGNATURE changes the:
Republic v. Ebrada 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 any other change or addition which alters the effect
of the instrument in any respect, is a material alteration.
Facts:
Ebrada was holding a check that was from the Bureau of Treasury.
Date
Ebrada went to Republic Bank to encash the check. Upon encashment,
It can affect the liability of a party in the sense that payment is hastened.
he gave the money to Dominguez, then to Domino. The Bureau of
Treasury called the bank informing them that the check was forged
Amount
because Mr. Lorenzo has already been dead for more than 10 years.
Decrease or increase in the amount is material. It will definitely change
Bureau asked the bank to return the money and the bank asked Ebrada
the liability.
to return the money but the latter refused.
Time
Ebrada’s defense is that he is a holder in due course, and that the bank
This is synonymous to date. The place of payment would require you
is negligent in accepting the check.
to go somewhere. It is an additional expense on the part of the debtor.
It requires an additional act on the debtor.
Held:
Drawee bank can recover because although drawee bank was negligent
Number or the relations of the parties
in failing to detect the forgery, the cashier had performed his duty, the
Because there are more than one party, they could be jointly liable so
forgery would have been detected.
the demand of payment should be to each of them. It could be altered
from solidary and you make it joint, or from joint and you make it
In this case, there is forgery in the signature of the indorser. As a rule,
solidary, there is a different legal implication on whom you can demand
if the forged signature is that of an indorser, person liable is the
payment from.
subsequent parties. Drawee and drawee should not be held liable except
when there is negligence.
Adding a place where no space is specified
There is an additional act to be done by the party.
In this case, the general rule is applied. Liability should be in the hands
of the person who caused the loss to happen.
Insertion of a date on a blank portion is not material alteration
What will apply is Sec. 13 instead of Sec. 124 because there is really an
Under the rules, if the DRAWEE bank pays on a forged signature,
intention to put a date there. It just so happens that there is no date
granting that it is not the signature of the DRAWER, the DRAWEE bank
placed. There will be material alteration if you change whatever was the
can go after the person whom the bank made payment. So in this case,
date inserted.
the DRAWEE bank can go after Ebrada.
Relevant Codal Provision
However, Ebrada remitted the money right away to Adelaida
Dominguez. While Ebrada cannot go after drawer and drawee bank, but Sec 13. When date may be inserted – Where an instrument expressed
she can go after subsequent parties. She can go after Dominguez from to be payable at a fixed period after date is issued undated, or where
whom she received the instrument. 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
It follows that Dominguez could go after Ramon R. Lorenzo, then acceptance, and the instrument shall be payable accordingly. The
Lorenzo to Martin Lorenzo (who in this case already died for more than insertion of a wrong date does not avoid the instrument in the hands of
11 years). a subsequent holder in due course; but as to him, the date so inserted
is to be regarded as the true date.
MATERIAL ALTERATION
MATERIAL ALTERATION IS A REAL DEFENSE
Relevant Codal Provision REAL DEFENSE
Sec. 124. Alteration of instruments; effect of – Where a negotiable This is because you cannot enforce the instrument as it is. Prior parties
instrument is materially altered without the assent of all parties liable to the material alteration can raise it as a defense. They can make
thereon, it is avoided, except as against a party who has himself made, payment but it is not the payment based on the amount in the
authorized, or assented to the alteration and subsequent indorsers. instrument presented to them. Instead, they can only be demanded to
pay the original tenor of the instrument.
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 Atty. Amago: This should have been a hybrid defense—both a personal
payment thereof according to its original tenor. and a real defense—because it can be raised against a holder in due
course, although he can still receive payment based on the original tenor
of the instrument. So it’s not like any other real defense. But authors the amount of P300 only which is the original amount of the
would classify it as real defense. So it is a real defense then. check. LBP can get the P379,700 from Samuel Tagoe.
LIABILITY OF PARTIES Atty. Amago: However, the case was not decided based on Material
Alteration because it was FEBTC who filed a case against Gold Palace.
ONLY PRIOR PARTIES ARE LIABLE That changed the matter that's why it did not mention material
The law provides that it is only the prior parties who can be held liable alteration in relation to LBP. It just said that FEBTC can go after LBP
to the extent of the original tenor. So as to a holder not in due course, and/or Samuel Tagoe. LBP is liable because, being the drawee-acceptor,
prior parties are never liable on the instrument. That is why it is it engaged to pay based on the tenor of its acceptance, it accepted the
considered as a real defense. amount of P380,000, so it should be held liable for it.
It is a hybrid defense because as to a holder in due course, you can still While a particular party can be liable only for the original tenor of the
hold prior parties liable to the extent of the original tenor. All the rest instrument, don't stop there in relation to subsequent parties because if
will be the same for the holder in due course, holder through a holder they will only fake the original tenor of the instrument, then subsequent
in due course, and holder not in due course. parties may still be held liable for the remaining amount.
FEBTC v. Gold Palace Jewellery Co. Additional illustration

Maker (M) drafted an instrument worth P1,000 and transferred it to
UOB Tagoe Gold FEBTC Payee (P). P transferred it to A who altered the check from P1,000 to
(Dr) (P300-P380k) Palace (Collecting Bank) P10,000 and negotiated it to B then B to C who is a holder in due course
(HDC).
LBP
(De)
Facts: Samuel Tagoe purchased from Gold Palace several pieces of

jewelry valued at P258,000. In payment thereof, Tagoe offered Foreign Implications:
Draft issued to it by United Overseas Bank (UOB), addressed to Land (1) C can compel M to pay the amount to the extent of P1,000 which
Bank (LBP) and made payable to Gold Palace for P380,000. is the original tenor of the instrument.
(2) Since C can only get P1,000 from M, C can collect the balance of
Prior to releasing the items, Gold Palace told Tagoe to wait for the draft P9,000 from the subsequent parties liable starting from B to A.
to be cleared and thereafter deposited the instrument to its account with (3) C cannot go after P because M already paid the P1,000 and P is not
FEBTC. FEBTC, being the collecting bank, presented the instrument to a party to the alteration. If M cannot pay C, P can be compelled to
LBP, the drawee bank, and the latter cleared the same. Consequently, pay for P1,000. Moreover, had the instrument been a bearer
UOB’s account with LBP was debited and Gold Palace’s account was instrument, P is still NOT liable.
credited. (4) C can go after B and require the payment of P9,000 because C
already got the P1,000 from M.
Tagoe collected the purchased items from Gold Palace and the latter (5) C can go after A or B to the extent of P9,000 if M already paid
even gave a change. P1,000. If B only paid P4,500, C can still go after A to collect the
balance of P4,500. This is without prejudice to B’s right to collect
Weeks after, LBP informed FEBTC that the instrument was materially P4,500 (the amount it paid to C) from A because A is ultimately
altered from P300,000 to P380,000. LBP asked FEBTC to return the liable, being the perpetrator.
money which the latter did and debited account of Gold Palace without
informing the latter. Since portion of the amount was already withdrawn SUMMARY:
by Gold Palace, FEBTC demanded for the remaining amount to satisfy
the P380,000 it has refunded to LBP. Gold Palace did not heed demand HOLDER IN DUE COURSE
so FEBTC filed action for sum of money.
1. Prior parties – liable only according to the original tenor
Issue: Whether Gold Palace is liable. 2. Subsequent parties:
a. Indorser – liable
Held: No. Gold Palace is not liable. b. PNBD – liable if immediate transferor
c. Perpetrator – ultimately liable
Gold Palace exercised due diligence when it waited for the check to be
cleared before the items were released to Samuel Tagoe. This is a case HOLDER THROUGH HOLDER IN DUE COURSE
of negligence on the part of LBP. FEBTC can go after LBP or Samuel Same
Tagoe who is ultimately liable.
But if this case is decided on the reason of material alteration alone, the
following shall be liable to FEBTC: 1. Prior parties – not liable
(1) Samuel Tagoe shall be liable for P380,000 because he caused the 2. Subsequent parties:
alteration. a. Indorser – liable
(2) LBP shall be liable for P380,000 because as an acceptor of the b. PNBD – liable if immediate transferor
check, he warrants to pay the check and engages to pay the c. Perpetrator – ultimately liable
instrument in accordance with the tenor of its acceptance. So
when it accepted the check after FEBTC presented it, it accepted
the amount of P380,000 and so it should be held liable for that
amount. What LBP can do is only to debit the account of UOB for
SEQUENCE IN ENFORCEMENT OF PAYMENT resolution, they are considered ultra vires or beyond the scope of its
authority.
SEQUENCE FROM WHOM TO DEMAND OR ENFORCE PAYMENT
The act of the representative, even if approved by the Board of
Promissory note Directors, is itself ultra vires if the act of negotiating the instrument is
1. The holder must go first to the Maker, the person primary liable not one of those acts granted to it, incidental, implied or stated under
2. If the maker is unable to pay, the holder must go to the person its charter documents or the Articles of Incorporation submitted to SEC
from whom it acquired the instrument, the immediate transferor or for the purpose of registration.
indorser of C, i.e., B.
3. Then to the next indorsers A, then P. Reason: In dealing with the corporation, it is incumbent upon the
clients to make inquiries as to the extent of the authority granted to the
Bill of Exchange representative. Good practice suggests that clients must ask the
1. The holder must go first to the drawee, the person primary liable notarized Board Resolution or Secretary Certificate attested by the
2. If the drawee dishonors the instrument, go to the drawer President.
3. If the drawer is unable to pay, then the holder can go to the person
from whom it acquired the instrument, the immediate transferor or PERSONAL TO THE PARTY CONCERNED
indorser The defense is peculiar in nature as it is personal to the party. It can
4. Then to the next indorsers. only be raised by such particular party only.
Atty Amago: If it is an order instrument, the holder can just go to any TN: Parties subsequent to the minors or corporation can be held liable
of the indorsers. But in practice, the holder, after going to the person because they made a warranty that all prior parties have the capacity to
primarily liable, should go to the person from whom he acquired the contract.
instrument as he gave out a consideration out of the instrument and yet
it turns out to be of no or less value AMBIGUITY
Atty. Amago’s Tips: Relevant Codal Provision
When answering, make sure that you set the premise. Don’t just say "M Sec. 17. Construction where instrument is ambiguous. – Where the
can be held liable to the extent of the original tenor of the instrument, language of the instrument is ambiguous, or there are omissions therein,
then B can also be held liable because he warrants the...". You must the following rules of construction apply:
include in the answer the amount of liability. (a) Where the sum payable is expressed in words and also in figures
and there is discrepancy between the two, the sum denoted by
Answer in this manner: the words is the sum payable; but if the words are ambiguous or
If M already paid the amount of P1,000 then the excess of P9,000 can uncertain, reference may be had to the figures to fix the amount;
be collected from other subsequent parties. If the HDC of the instrument (b) Where the instrument provides for the payment of interest,
can collect/enforce payment from the prior parties only to the extent without specifying the date from which interest is to run, the
original tenor of the instrument, the excess can be collected from the interest runs from the date of the instrument, and if the
other parties subsequent from the defect. instrument is undated, from the issue thereof;
(c) Where the instrument is not dated, it will be considered to be
MINORS AND CORPORATION dated as if the time it was issued;
(d) Where there is a conflict between the written and printed
Relevant Codal Provision provisions of the instrument, the written provisions prevail;
Sec. 22. Effect of indorsement by infant or corporation. – The (e) Where the instrument is so ambiguous that there is doubt
indorsement or assignment of the instrument by a corporation or by an whether it is a bill or note, the holder may treat it as either at his
infant passes the property therein, notwithstanding that from want of election;
capacity the corporation or infant may incur no liability thereon. (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;
MINORS (g) Where an instrument containing the words “I promise to pay” is
MINORITY AS A REAL DEFENSE signed by two or more persons, they are deemed to be jointly and
severally liable thereon.
General rule: Minority is a real defense but it can only be raised by the
minor himself. The holder of the instrument cannot make the minor APPLICABLE ONLY IN CASE OF DOUBT
liable. The rules in this section are applicable only when the instrument in
question is ambiguous, uncertain or when there are omissions. If the
Exception: The minor makes representation to the public that he is of terms are clear, the instrument must be enforced as it reads.
legal age when in truth and in fact, he is a minor. The minor already
committed fraud and cannot be allowed to raise the defense of minority. Sums expressed in words and figures different
When there is a discrepancy between the sum expressed in words and
sum expressed in figures, the former controls.
CORPORATIONS
ULTRA VIRES ACTS Reason: It is easier to change the figures or to commit a mistake on
them than when the amount is written in words.
A corporation cannot be held liable for the ultra vires acts of its
representative. But the representative can be held personally liable as Words ambiguous or uncertain
he did the act beyond the scope of given authority. GR: Words outweigh figures.
XPN: When the words are ambiguous or uncertain, reference may be
The representative of the corporation can only be authorized through a had to the figures to determine the true amount.
Board Resolution from BOD. Where acts of issuing negotiable
instrument and negotiating such are not among those provided in the
Example: The check bears the figures P365.00 and the amount written CONSIDERATION
is “three sixty five pesos” – the marginal figures control.
Consideration
Date when stipulated interest to run not specified An inducement to a contract, that is, the cause, price or impelling
A. If the date when the stipulated interest is to run is not specified – influence which induces a contracting party to enter into a contract.
the interest runs from the date of the instrument
B. If undated – interest runs from the date of issue PRESUMPTION OF CONSIDERATION
C. If there is no rate of interest – legal rate of interest 6% (Circular
No. 799) Relevant Codal Provision
Sec. 24. Presumption of consideration. – Every negotiable instrument is
Instrument undated deemed prima facie to have been issued for a valuable consideration;
An undated instrument is considered dated as of the date of its issue. and every person whose signature appears thereon to have become a
party thereto for value.
Issue – first delivery of the instrument complete in form, to a person
who takes it as holder. Consideration
Any prestation sufficient to support any contract in favor of the party to
Written and printed provisions in conflict an instrument, such as a maker or indorser, and it may consist in giving,
In case of conflict between the written and printed provisions, the doing, or not doing.
former prevail.
Prestation – obligation to give, to do or not to do.
Reason: The written words are deemed to express the true intention of
the maker or drawer because they are placed there by himself. On the Presumption of consideration
other hand, printed forms are prepared without any particular contract If the negotiable instrument does not provide for a consideration, the
in view. instrument is still valid because consideration is always presumed. It
need not be stated in the negotiable instrument.
Whether instrument bill or note in doubt
In case of doubt as to whether an instrument is a bill or a note, the TN: The presumption that consideration exists is only prima facie. Thus,
holder may treat either at his election. it can be rebutted by evidence to the contract. The evidence must be
convincing to overthrow the presumption. It is not overcome by a mere
Example: denial of receipt of the consideration.
To: W
I promise to pay P or order P10,000.
Sgd. Y WHAT CONSTITUTES VALUE
Relevant Codal Provision

This is ambiguous because the promise to pay indicates that it is a PN
but the fact that it is addressed to W (a drawee) indicates that it is a Sec. 25. Value, what constitutes. – Value is any consideration sufficient
BoE. In which case, the holder may treat the instrument as either at his to support a simple contract. An antecedent or pre-existing debt
election. constitutes value; and is deemed such whether the instrument is
payable on demand or at a future time.
Capacity in which person signed in doubt
In case of doubt as to what capacity the person making the instrument Valuable consideration
intended to sign – he is to be deemed an indorser. Anything which requires a party to give, to do or not to do as a condition
for issuing a negotiable instrument.
TN: This applies only when there is doubt due to the ambiguous location
of the signature. TN: Love, affection or moral obligation is not a valuable consideration.
They are not considered as valuable consideration enough to support a
Instrument signed by two or more persons negotiable instrument. But they can support a simple contract like
An instrument with the words “I promise to pay” signed by two or more donation. However, for the purposes of Negotiable instrument law, they
persons – gives rise to solidary liability. Thus, any one of the signers are not valuable considerations.
may be held liable for the whole amount of the instrument.
Pre-existing debt
TN: However, if “we promise to pay” and signed by two makers imparts A pre-existing debt can be a valuable consideration. The discharge of
only joint liability. such debt is a valuable consideration for a negotiable instrument. It
must be shown that the holder has given up the pre-existing debt or the
Where the name of the payee is not a name of a person right to sue.
If the instrument says, I promise to pay to the order of P or bearer 1M
signed X. It should be treated as bearer instrument because it is issued Future debt is not a valuable consideration
to the order of a name which is not purported to be a name of any Future debt cannot be a considered as valuable consideration because
person. at the moment you issue the instrument, there is no consideration yet.
Pre-existing debt of an insolvent estate is not a valuable consideration

If a widow of an insolvent estate issued a negotiable instrument to pay
the debt of the decedent, the instrument is not deemed issued for a
consideration if it is issued against the insolvent estate because when
the estate is insolvent, it means that all pre-existing debts are cancelled.
Debt is cancelled along with the death of the decedent.
Whoever issued the instrument does not matter because with the
insolvency of the estate, all pre-existing debts are deemed cancelled.
It doesn’t matter whether one has the capacity. What matters is the B. If the amount of the instrument is less than or the same as the
reason of the issuance of the instrument. The consideration is the reason debt secured by such instrument – the pledgee is a holder for value
why you are issuing the negotiable instrument. for the full amount and may thus recover all.
If you are issuing it for a pre-existing debt of an insolvent decedent, Rules in case defenses are available
then the instrument is deemed not issued for a consideration for after A. If there are existing defenses between the pledgor and the party
all there is no debt to speak of. liable on the instrument – pledgee can collect on the instrument
only to the extent of the amount of the debt.
Security for pre-existing debt B. If the defenses of the party liable on the instrument are real
The transfer of negotiable instruments as security for pre-existing debt defenses – pledgee cannot recover anything.
is a valuable consideration.
Example: M owes P1, 000 payable today. M fails to pay in cash. He EFFECT OF WANT OF CONSIDERATION
issues a check for said amount to P who accepts the same. Here, the
consideration for the check is the pre-existing debt of M. Relevant Codal Provision
Sec. 28. Effect of want of consideration. – Absence or failure of
If the negotiable instrument is issued to a person as a security for a consideration is a matter of defense as against any person not a holder
certain debt, while there is no negotiation of a negotiable instrument in due course; and partial failure of consideration is a defense pro tanto,
(issued only as a security not negotiated in the sense of negotiation whether the failure is an ascertained and liquidated amount or
under the NIL) it doesn’t mean that you can’t go after the negotiable otherwise.
instrument after all this instrument was used as a security. You are not
a party to the instrument but you can have a claim to the instrument. This is a personal defense
If ever there is lack of consideration as in the case where the instrument
Example: If the instrument amounted to P1M, the debt is P500K, and is given freely to the payee, it can be raised as a defense only against a
there is a P1M promissory note used to secure the P500K debt, whoever person not a holder in due course.
is the creditor to whom this PN was delivered as security of such debt
can have a claim on the negotiable instrument but he is not a party to ABSENCE OR WANT OF CONSIDERATION
the instrument. Total lack of any valid consideration for the contract, in consequence of
which the alleged contract must fall.
After the obligation has matured, you can ask whoever is the maker of
the instrument to negotiate the instrument to you. Example: M makes a Promissory Note to P in payment for a parcel of
land which does not exist.
HOLDER FOR VALUE
As between the parties, there can be no recovery on the note as there
Relevant Codal Provisions is absence of consideration. But if P indorses the note to A, a holder in
Sec. 26. What constitutes holder for value. – Where value has at any due course, A can recover from M because absence of consideration is
time been given for the instrument, the holder is deemed a holder for only a personal defense not available against a HDC.
value in respect to all parties who become such prior to that time.
Insufficiency of consideration is not a defect in the instrument
Sec. 27. When lien on instrument constitutes holder for value – Where Example: The consideration is P1 for P100K negotiable instrument. This
the holder has a lien on the instrument, arising either from contract or can amount to a donation since it is not issued for a valuable
by implication of law, he is deemed a holder for value to the extent of consideration. But in that sense, where the amount is so low that it can
his lien. be deemed a donation, it can amount to lack of consideration.
Holder for value – one who has given a valuable consideration for the FAILURE OF CONSIDERATION
instrument issued or negotiated to him. Failure or refusal of one of the parties to do, perform or comply with the
consideration agreed upon. In other words, something was agreed upon
Take note: as consideration but for some cause, such agreed consideration failed
1. The holder is deemed as such not only as regards the party to to materialize.
whom value has been given by him but also in respect to all those
who became parties prior to the time when value was given. Example: You engage in a sale of parcel of land (ought to be inherited
2. He is presumed a holder for value until the contrary is shown. from parents) and then such was sold by your parents days after your
3. Absence of consideration is a personal defense (can only lie against transaction.
a holder not in due course)
1. This is want or lack of consideration because:
Where a holder has lien on instrument A. You cannot sell an inheritance
One who has taken a negotiable instrument as collateral security for a B. You don’t own the property. You cannot sell what you do not
debt has a lien on the instrument. own.
TN: As such holder of collateral security – he would be a pledgee 2. But, if you were authorized in the first place but it was sold by
(governed by the provisions of the Civil Code) another broker – there is only failure of consideration.
Extent of lien TN: Nonetheless, any of the two may still be considered as a personal
A. If the amount of the instrument is more than the debt secured by defense.
such instrument – the pledgee is a holder for value to the extent
of his lien. (The surplus shall be delivered to the pledgor)
Want of Consideration Right to present parol evidence to prove accommodation

If not authorized in the first place or there is really no valuable One of the problems in this undertaking is that you may not know if one
consideration or you issue a negotiable instrument on the basis of love is an accommodation party or not, thus it is an established principle
and affection, there is want of consideration. under NIL that an accommodation party can present parol evidence.
Failure of Consideration The accommodation party is permitted to show by parol evidence which
You have the authority but after a condition is set and you can’t deliver, party he accommodated. Otherwise, if this was not allowed, an
there is failure of consideration. accommodated party may enforce payment of the instrument against
the accommodation party.
Rule in case of partial failure of consideration
In case of partial failure of consideration, this would bar recovery only General rule: Negotiable instrument is a contract and one can’t present
pro tanto. parol or oral evidence. The contract itself is already the evidence of what
was agreed upon. A party is precluded from saying anything against the
Example: If only 2/3 portion of the land was delivered, there would be stipulations of the contract.
a partial failure of consideration which would bar recovery only pro
tanto. Hence, P could recover only 2/3 of the note as M is not liable to Exception: Parol evidence may be used to present proof as an
the extent of the 1/3 which is the price of the undelivered portion. accommodation party.
ACCOMMODATION PARTY AND ITS LIABILITIES Accommodation party and regular party distinguished
Relevant Codal Provision Accommodation party Regular party

Sec. 29. Liability of accommodation party. – An accommodation party is Signs an instrument without
receiving value therefor Signs the instrument for value
one who has signed the instrument as maker, drawer, acceptor, or
indorser, without receiving value therefor, and for the purpose of Signs an instrument for the
lending his name to some other person. Such a person is liable on the purpose of lending his name to Does not sign for that purpose
instrument to a holder for value, notwithstanding such holder at the time some other person
of taking the instrument know him to be only an accommodation party. May always show by parol Cannot disclaim or limit his
evidence that he is only such personal liability as appearing
Accommodation Party on the instrument by parol
Person who: evidence
1. Signed the instrument as a maker, drawer, acceptor or indorser. Cannot avail of the defense of
2. Without receiving any value absence or failure of May avail of said defense
3. For the purpose of lending his name to the instrument. consideration against a holder against a holder not in due
not in due course course
Example: Atty. Amago – has good credit; Mr. Divinagracia – has no good After paying the holder, may
credit. For him to be able to loan from the bank, Atty. Amago will issue ask sue for reimbursement from May not sue any subsequent
a negotiable instrument in his favor so that he can offer it as a security the accommodated party, party for reimbursement
for his loan from the bank. although a subsequent party
Important: Issue on want of consideration is not a defense available

to an accommodation party against holders for value who are also
holders in due course.
Accommodation party’s defense of want of consideration

It is possible that one is a HNDC but is a holder for value. One is a
HNDC not for the reason that he did not receive value for the negotiable
instrument but due to other reasons (i.e. taking the instrument when
overdue). You are a holder for value but not a holder in due course.
In this case, an accommodation party may raise the defense of want of

consideration applying Sec. 28. (If there is want of consideration, you
can raise it against a holder not in due course) Sec. 29 is only applicable
to holders for value who are also holders in due course.
Meaning of “without receiving value therefor”

Means that no value has been received for the negotiable instrument
and not “without receiving payment for lending his name”.
Being an accommodation party doesn’t mean that you don’t accept any
value at all. You don’t receive any value for negotiating the instrument
but for purposes of lending one’s name, you may.
Example: M is given P1, 000 in consideration of lending his name, but

not for the promissory note he signs, M does not lose his status as an
accommodation party.

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NEGOTIABLE INSTRUMENTS LAW Atty.

Bernardino Amago l For the exclusive use of EH 404 2016-2017

PRELIMINARIES FUNCTIONS OF NEGOTIABLE INSTRUMENTS

Negotiable Instruments Law in the Philippines It is a medium for exchange

Purpose of NIL It is a means of making immediate payment

CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS FORM OF NEGOTIABLE INSTRUMETS

Example: A issues a negotiable instrument in favor of B. B negotiates Location of the signature

There is no requirement as to what signature you’ll place, for as long as

MUST CONTAIN AN UNCONDITIONAL PROMISE OR AN INDICATION OF A PARTICULAR FUND OUT OF WHICH

Is death a condition? What about if “Arose from a loan contract?”

Relevant provision When is sum considered certain in money?

PROVISION ON PAYMENT ON CURRENT EXCHANGE RATES X ---- A --- B --- C --- D

Payee is not the maker

2. May not be a negotiable instrument because it does not state a

TN: But again, because of the words of negotiability, this may be

(a) At a fixed period after date or sight; or

Gloria, the employee of Golden Savings was insistent in following-up

Additions not affecting negotiability Cognovit actionem is valid

When will the presumption not apply? Example:

Does he need to be a party to the defect or mere knowledge Relevant provision

DEFECTS OF A NEGOTIABLE INSTRUMENT

IN THE HANDS OF A HOLDER IN DUE COURSE Same facts, information available:

TN: Facts above apply to all instances under Scenario 2.

ILLUSTRATIONS Rights of D in relation to prior parties

Rights of E in relation to subsequent parties

Rights of E in relation to prior parties

Same facts, information available: IN THE HANDS OF A HOLDER IN DUE COURSE

Rights of E in relation to prior parties ILLUSTRATIONS

Rights of D in relation to subsequent parties Relevant Provision

BILL OF EXCHANGE ORDER INSTRUMENT FORMS OF FORGERY COVERED UNDER SECTION 23

1. Fraud in factum or fraud in esse contractus (Fraud amounting

Relevant provision FRAUD NOT CONSIDERED FORGERY UNDER SECTION 23:

Example: Kobe Bryant intended to issue a negotiable instrument in B. Subsequent parties

MCQ Question: BILL OF EXCHANGE

EFFECTS OF FORGERY B. Subsequent parties

RULES IN RELATION TO FORGERY Signature of Indorser is forged

TN: When you forge the signature of the indorser in a bearer

Rights of B in relation to the forger

Flow of Promissory note Instrument: Promissory Note; Payable to Bearer

Facts: T’s signature was forged by F before it was delivered to X. X

Rights of C in relation to prior parties

Rights of C in relation to subsequent parties

Flow of Promissory note Rights of D in relation to prior parties (M and P)

FEBTC v. Gold Palace Jewellery Co. Additional illustration

Facts: Samuel Tagoe purchased from Gold Palace several pieces of

Relevant Codal Provision

Pre-existing debt of an insolvent estate is not a valuable consideration

Want of Consideration Right to present parol evidence to prove accommodation

Relevant Codal Provision Accommodation party Regular party

Important: Issue on want of consideration is not a defense available

Accommodation party’s defense of want of consideration

In this case, an accommodation party may raise the defense of want of

Meaning of “without receiving value therefor”

Example: M is given P1, 000 in consideration of lending his name, but

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