NEGOTIABLE

INSTRUMENTS
LAW (NIL)
SECOND TERM A.Y. 20-21
OCT 5 – NOV 7
DISCUSSION
OUTLINE
(WEEK ONE)
 Brief Introduction
 Functions & Importance
 Characteristics
 Distinctions
 Commercial Papers
 Definitions of Terms
 Requisites
NEGOTIABLE
INSTRUMENT
S LAW
(NIL)
Negotiable Instruments (NI)
 These are written contracts for the payment
of money; by its form, intended as a substitute
for money and intended to pass from hand to
hand, to give the holder in due course the right
to hold the same and collect the sum due.
Functions & Importance
 As a substitute for money – although they do not constitute legal tender
(Art.1249), and are not money, they are used as a substitute for money.
 As a medium of exchange for most commercial transactions –
negotiable papers, particularly checks, constitute, at present, the media
of exchange for most commercial transactions.
 As a medium of credit transactions – avail credit by executing his note
to the creditor, who in turn indorses this to third person.
Characteristics
 Negotiability – right of transferee to hold the instrument and collect the sum
due
 Accumulation of secondary contracts – instrument is negotiated from person
to person
Difference between Negotiable Instruments from
Non-Negotiable Instruments:
Negotiable Instruments Non-negotiable Instruments 

Contains all the requisites of Sec. 1 of the NIL does not contain all the requisites of Sec. 1 of the NIL

Transferred by negotiation transferred by assignment

Holder in due course may have better rights than transferor transferee acquires rights only of his transferor 

Prior parties warrant payment prior parties merely warrant legality of title

Transferee has right of recourse against intermediate parties transferee has no right of recourse 
Difference between Negotiable Instruments and
Negotiable Documents of Title
Negotiable Instruments Negotiable Documents of Title 

Have requisites of Sec. 1 of the NIL does not contain requisites of Sec. 1 of NIL

Have right of recourse against intermediate parties

no secondary liability of intermediate parties
who are secondarily liable

Holder in due course may have rights better than transferee merely steps into the shoes of the
transferor transferor
Subject is money subject is goods

instrument is merely evidence of title; thing of value

Instrument itself is property of value
are the goods mentioned in the document
Commercial Papers with limited negotiability
1. Document of Title – It is a receipt or order for the delivery of goods.
Example: bill of lading, dock warrant or warehouse receipt
2. Letters of Credit – It is in favor of a specified person and not to order.
3. Trust Receipt – It is a document of security pursuant to which a bank
acquires a “security interest” in the goods under trust receipt.
4. Certificate of stock – It is a muniment of title to a given share in the
assets of the corporation.
5. Pawn ticket – not a negotiable instrument under NIL.
DEFINITION OF TERMS
 Promissory Note (PN) – unconditional promise to pay in writing
made by one person to anther, signed by the maker, engaging to
pay on demand or a fixed determinable future time a sum certain
in money to order or bearer. When the note is drawn to maker’s
own order, it is not complete until indorse by him. (Sec. 184 NIL)
 Parties:

maker
payee
DEFINITION OF TERMS
 Bill of Exchange (BOE) – unconditional order in writing addressed
by one person to another, signed by the person giving it, requiring
the person to whom it is addressed to pay on demand or at a fixed or
determinable future time a sum certain in money to order or to
bearer. (Sec. 126 NIL)
 Parties:

drawer
payee
drawee/ acceptor
DEFINITION OF TERMS
 Check – bill of exchange drawn on a bank and payable on
demand. (Sec. 185 NIL)
 Difference between Promissory Note and Bill
of Exchange

Promissory Note Bill of Exchange 

Unconditional promise unconditional order

Involves 2 parties involves 3 parties

Maker primarily liable drawer only secondarily liable

generally 2 presentments – for acceptance and for

only 1 presentment – for payment
payment
 Distinctions between a Check and Bill of
Exchange
CHECK BOE
– always drawn upon a bank or banker – may or may not be drawn against a bank

– may be payable on demand or at a fixed or determinable

– always payable on demand
future time

– not necessary that it be presented for acceptance – necessary that it be presented for acceptance

– drawn on a deposit – not drawn on a deposit

– the death of a drawer of a check, with knowledge by the – the death of the drawer of the ordinary bill of exchange
banks, revokes the authority of the banker pay does not

– must be presented for payment within a reasonable time – may be presented for payment within a reasonable time
after its issue   (6 months) after its last negotiation.
 Distinctions between a Promissory Note
and Check
PN CHECK

– there are three (3) parties, the drawer, the drawee bank
– there are two (2) parties, the maker and the payee
and the payee

– may be drawn against any person, not necessarily a

– always drawn against a bank
bank

– may be payable on demand or at a fixed or

-always payable on demand
determinable future time

– a promise to pay – an order to pay

SALIENT PROVISIONS
OF
NIL
 Requisites
Section 1. Form of negotiable instruments. - An instrument to be negotiable
must conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in

money;

(c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be named or

otherwise indicated therein with reasonable certainty.
A) It must be in writing and signed by the maker
or drawer
 The instrument must be in writing or reduced in
tangible form, otherwise, nothing could be
negotiated or passed from hand to hand.
 Writing includes not only that which has been
written on paper with a pen or pencil but also
that which is in print (Sec. 191)
A) It must be in writing and signed by the maker
or drawer
 As a general rule, the signature of the maker or
drawer is placed at the lower right hand corner
of the instrument.
 Signature is usually written in longhand. But
initials or any mark will be sufficient, provided
that such signature be used as a substitute and
the maker or drawer intends to be bound by it.
B) It must contain an unconditional promise or order
to pay. (Sec.3)

Sec. 3. When promise is unconditional. – An

unqualified order or promise to pay is unconditional
within the meaning of this Act, though couple with –
a) An indication of a particular fund out of which
reimbursement is to be made, or a particular
account to be debited with the amount; or
b) A statement of the transaction which give rise to
the instrument
But an order or promise to pay out of a particular fund
is not unconditional.
B) It must contain an unconditional promise or order
to pay.

It must not be subject to any condition or contingency. Instruments which are

not to be paid until condition has happened or been fulfilled would be of little
practical value in business.
 Illustrations:
“Pay to the order of P1,000.00 and reimburse yourself from the
rentals of my house.” – The drawee may pay the amount out of any
fund. It is only the reimbursement that is to come from the rentals.
“Pay to the bearer the sum of P10,000.00 out of the dividends
which I may receive from X Corporation.”
C. Must be payable on demand, or at or determinable future time
Sec. 4. Determinable future time; what constitutes. - An instrument
is payable at a determinable future time, within the meaning of
this Act, which is expressed to be payable:
(a) At a fixed period after date or sight; or

(b) On or before a fixed or determinable future time specified

therein; or

(c) On or at a fixed period after the occurrence of a specified

event which is certain to happen, though the time of happening be
uncertain.
An instrument payable upon a contingency is not negotiable, and
the happening of the event does not cure the defect.
C. Must be payable on demand, or at or determinable future time
Certainty of Payment
1) Payable at all events
2) When time of payment is certain
a. Payable at a fixed time
b. Payable at a fixed period after date
c. Payable at a fixed period after sight
d. Payable on or before at a fixed time
e. Payable on or before a determinable future time
f. Payable on the occurrence of a specified event.
g. Payable after the occurrence of a specified event.
 Illustrations:

A. “I promise to pay P or order the sum of P10,000 on September 30,

2020.”
B. “Sixty days after date, I promise to pay P or order the sum of P10,000.”
C. “Sixty days after sight, I promise to pay P or order the sum of
P10,000.”
D. “On or before…
E. “On or before the start of the next school semester…
F. “Upon the death of his father…”
G. “Thirty days after his father’s death…”
 D. Must be payable to order or bearer
Sec. 8 When payable to order. - The instrument is payable to
order where it is drawn payable to the order of a specified person
or to him or his order. It may be drawn payable to the order of:
(a) A payee who is not maker, drawer, or drawee; or

(b) The drawer or maker; or

(c) The drawee; or

(d) Two or more payees jointly; or

(e) One or some of several payees; or

(f)  The holder of an office for the time being.

Where the instrument is payable to order, the payee must be
named or otherwise indicated therein with reasonable certainty.
 D. Must be payable to order or bearer
Sec. 9. When payable to bearer. - The instrument is payable to
bearer:
(a) When it is expressed to be so payable; or

(b) When it is payable to a person named therein or bearer; or

(c) When it is payable to the order of a fictitious or non-

existing person, and such fact was known to the person
making it so payable; or

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

(e) When the only or last indorsement is an indorsement in

blank.
E. The payee must be named with reasonable
certainty
 If there is no payee, there would be no one to indorse the
instrument payable to order. Therefore, it will be useless to be
considered negotiable.
 Joint payees indicated by the conjunction “and,” – to negotiate,
all must indorse.
 Being several payees is indicated by the conjunction “or”
WHEN DATE MAY BE INSERTED IN AN
INSTRUMENT
 An instrument expressed to be payable at a fixed period after the date is
issued undated.
 Where acceptance of an instrument payable at a fixed period after sight in
undated.
EFFECTS
1. Any holder may insert the true date of issuance or acceptance.
2. The insertion of a wrong date does not avoid the instrument in the hands of
subsequent holder in due course.
3. As to the holder in due course, the date inserted (even if it be a wrong date)
is regarded as the true date.
WHO IS A HOLDER IN DUE COURSE
(HIDC)?
Under Sec. 52, an HIDC is a holder who has taken the instrument
under the following conditions:
 That is complete and regular upon its face;
 That he became the holder of it before it was due, and without notice
that it has been previously dishonored, if such was the fact;
 That he took it in good faith and for value;
 That at the time it was negotiated to him, he had no notice of the
infirmity in the instrument or defect in the title of the person
negotiating it.
SUBSEQUENT HIDC NOT AFFECTED BY
THE FOLLOWING DEFICIENCES:
 Incomplete but delivered instrument (Sec 14)
 Complete but undelivered (Sec. 16)
 Complete and delivered issued without consideration or a
consideration consisting of a promise which was not fulfilled
(Sec 28)
WHEN HIDC IS AFFECTED BY THE FOLLOWING DEFICIENCES
/ABNORMALITY:

 Incompleteand undelivered instrument (Sec 15)

 Maker/drawer’s signature is forged (Sec.23)
Steps in issuance of negotiable instrument.
There are always two steps involved in the issuance of every
negotiable instrument, namely:
(1) the mechanical act of writing the instrument completely and in
accordance with the requirements of Section 1; and
(2) the delivery of the complete instrument by the maker or the
drawer to the payee or holder with the intention of giving effect
to it. Such instrument, complete and delivered, is negotiable
and may be enforced accordingly.
 Incomplete but Delivered Instrument
1. Where an instrument is wanting in any material particular:
a. Holder has prima facie authority to fill up the blanks therein.
b. It must be filled up strictly in accordance with the authority given and within a
reasonable time.
c. If negotiated to a holder in due course, it is valid and effectual for all purpose as though
it was filled up strictly in accordance with the authority given and within reasonable time. (Sec.
14 NIL)

2. Where only a signature on a blank paper was delivered:

It was delivered by the person making it in order that it may be converted into a negotiable
instrument.
The holder has prima facie authority to fill it up as such for any amount. (Sec. 14 NIL)
 Incomplete but Delivered Instrument
If the instrument is wanting in material particular, mere possession of the
instrument is enough to presume prima facie authority to fill it up.

– material particular may be an omission which will render the instrument non-
negotiable (e.g. name of payee), an omission which will not render the
instrument non-negotiable (e.g. date)

– in the case of the signature in blank, delivery with intent to convert it into a
negotiable instrument is required. Mere possession is not enough.
 Illustration
M just delivered a blank paper containing his signature to P.
In order that P may have authority to fill it up for any amount, it must be shown
by him that the purpose of M was to convert the said blank paper into a
negotiable instrument. In the absence of such a showing, there cannot arise a
prima facie authority on the part of P to fill it up for any amount. ;
Thus, if M signs his name on a piece of paper and delivers it to P for the purpose
of identifying or comparing it with M's other signatures. M will not be liable
even to a holder in due course after it is converted into a negotiable instrument.
 Illustration
M authorized P to put in the blank only P10,000.00. However, P inserts the
sum of P20,000.00 and then indorses the note to A, from A to B, and from B
to C who is not a holder in due course.
It is believed that C, not being a holder in due course, can collect nothing on the
note from M The implication of the law is that when one or both requisites are
absent, the holder not in due course cannot recover. Such a holder is to be treated
the same way as a holder not in due course of a materially altered instrument,
(see Sec. 124.)
 Illustration
Let us now assume that C is a holder in due course. The defense that P
exceeded his authority will not avail against C for in such case, the note "is
valid and effective for all purpose in his hands and he may enforce it as if it has
been filled up strictly in accordance with the authority given and within a
reasonable time." In other words, Section 14 merely raises a personal defense,
(see Sec. 58.) The rule is founded upon the principle that where one of two
persons must suffer by the bad faith of another, the loss must fall upon the one
who first reposed confidence and made it possible for the loss to occur. (Philips
v. Hensley, 175 N.W. 23.)
Incomplete and Undelivered Instrument
 General Rule: Where an incomplete instrument has not been
delivered, it will not, if completed and negotiated without
authority, be a valid contract in the hands of any holder against
any person who signed before delivery. (Sec. 15 NIL)
Incomplete and Undelivered Instrument
 itis a real defense. It can be interposed against a holder in due
course.
 delivery is not conclusively presumed where the instrument is
incomplete
 defense of the maker is to prove non-delivery of the incomplete
instrument.
Rules where instrument incomplete and
undelivered.
(1) Defense even against a holder in due course. — The fact that
an incomplete instrument, completed without authority, has not
been delivered, is a defense even against a holder in due course.
 Illustration
Suppose M makes a note for PI,000.00 with the name of the payee in blank and keeps
it in his drawer. P steals the note and inserts his name as payee and then indorses the
note to A, A to B, B to C, and C to D, a holder in due course. (Sec. 52.) Can D enforce
the note against M?

No, because the law is specific that the instrument is not a valid contract in the hands of any
holder. And the phrase "any holder" includes a holder in due course. As the signature of M
was placed thereon before delivery, he does not assume any responsibility whatsoever. In
this case, a real defense exists, (see Sec. 58.) The instrument may be considered a forgery
insofar as M is concerned (see Sec. 23.) since both the two steps in the execution of a
negotiable instrument are not complied with. There is, however, a prima facie presumption
of delivery, which M must rebut by proof to the contrary. Under certain circumstances,
negligence on the part of M may render him liable to a holder in due course.
Rules where instrument incomplete and
undelivered.
(2) Defense available to parties prior to delivery.—The invalidity
of the above instrument is only with reference to the parties whose
signatures appear on the instrument before and not after delivery.
Illustration
In the same example, the instrument can be enforced against P, A,
B, and C because, as indorsers, they warrant that the instrument is
genuine and in all respects what it purports to be, etc. (see Sees. 65-
66.) As their signatures appear on the instrument after delivery, the
instrument is valid as to them. In the case of P, he is liable not
merely because he is an indorser but also because he is the one
responsible for the theft, and the completion and negotiation of the
instrument.
Complete but Undelivered
 General Rule: Every contract on a negotiable instrument is
incomplete and revocable until delivery for the purpose of giving
effect thereto.
 a. If between immediate parties and remote parties not holder in due
course, to be effectual there must be authorized delivery by the party
making, drawing, accepting or indorsing. Delivery may be shown to
be conditional or for a special purpose only
 b. If the holder is a holder in due course, all prior deliveries
conclusively presumed valid
 c. If instrument not in hands of drawer/maker, valid and intentional
delivery is presumed until the contrary is proven (Sec. 16 NIL)
Rules on delivery of negotiable instruments
1) delivery is essential to the validity of any negotiable instrument

2) as between immediate parties or those is like cases, delivery must be with intention
of passing title

3) an instrument signed but not completed by the drawer or maker and retained by him
is invalid as to him for want of delivery even in the hands of a holder in due course

4) but there is prima facie presumption of delivery of an instrument signed but not
completed by the drawer or maker and retained by him if it is in the hands of a holder in
due course. This may be rebutted by proof of non-delivery.
Rules on delivery of negotiable instruments
 5)    an instrument entrusted to another who wrongfully
completes it and negotiates it to a holder in due course, delivery
to the agent or custodian is sufficient delivery to bind the maker
or drawer.
 6)    If an instrument is completed and is found in the possession
of another, there is prima facie evidence of delivery and if it be a
holder in due course, there is conclusive presumption of delivery.
 7)    delivery may be conditional or for a special purpose but
such do not affect the rights of a holder in due course.
Rules on signature
General rule: a person whose signature does not appear on the
instrument in not liable.
 Exception:

1. one who signs in a trade or assumed name (Sec. 18)

2. a duly authorized agent (Sec. 19)
3. a forger (Sec. 23)
Rules on signature
General rule: an agent is not liable on the instrument if he were
duly authorized to sign for or on behalf of a principal.
 Requisites:

1. he must be duly authorized

2. he must add words to his signature indicating that he signs as an agent
3. he must disclose his principal (Sec. 20 NIL)

NOTE: If an agent does not disclose his principal, the agent is

personally liable on the instrument.
Per Procuration – operates as notice that the agent has a
limited authority to sign.
 Effects:
 the principal in only bound if the agent acted within the limits of
the authority given
 the person who takes the instrument is bound to inquire into the
extent and nature of the authority given. (Sec. 21 NIL)
FORGED SIGNATURE (Sec 23)
General rule: A signature which is forged or made without authority
is wholly inoperative.
 Effects:

1. no right to retain
2. no right to give a discharge
3. no right to enforce payment can be acquired. (Sec. 23 NIL)
 Exception:

the party against whom it is sought to be enforced is precluded from

setting up the forgery or want of authority.
FORGED SIGNATURE
Section 23 applies only to forged signatures or signatures made without authority
 Alterations such as to amounts or like fall under section 124
 Forms of forgery are a) fraud in factum b) duress amounting to fraud c)
fraudulent impersonation
 Only the signature forged or made without authority is inoperative, the
instrument or other signatures which are genuine are affected
 The instrument can be enforced by holders to whose title the forged signature
is not necessary
 Persons who are precluded from setting up the forgery are a) those who
warrant or admit the genuineness of the signature b) those who are estopped.
FORGED SIGNATURE
 Persons who are precluded by warranting are a) indorsers b) persons negotiating by
delivery c) acceptors.
 drawee bank is conclusively presumed to know the signature of its drawer
 if endorser’s signature is forged, loss will be borne by the forger and parties subsequent
thereto
 drawee bank is not conclusively presumed to know the signature of the indorser. The
responsibility falls on the bank which last guaranteed the indorsement and not the
drawee bank.
 Where the payee’s signature is forged, payments made by the drawee bank to
collecting bank is ineffective. No debtor/creditor relationship is created. An agency to
collect is created between the person depositing and the collecting bank. Drawee bank
may recover from collecting bank who may in turn recover from the person depositing.
Forgery explained
 By forgery is meant the counterfeit-making or fraudulent
alteration of a writing, and may consist in the signing of another's
name or the alteration of an instrument in the name, amount,
description of the person and the like, with intent thereby to
defraud.“
 "Mere variance of signatures cannot be considered conclusive
proof that the same were forged. Forgery and convincing
evidence, the burden of proof lies on the party alleging forgery.”
Proof of forgery
 Forgery, as any other mechanism of fraud, must be proven
clearly and convincingly, and the burden of proof lies on the
party alleging forgery. It cannot be presumed. A person who
denies issuing a note or check puts into question the genuineness
and authenticity of the. signature appearing thereon; it is he who
has the burden of proving the signature is a forgery.
Illustrations
1) P makes a promissory note payable to his own order, forging
M's signature as maker. The signature is inoperative and,
therefore, it did not operate to make M a party to the
instrument. M is not liable even to an innocent purchaser for
value.
2) X issues a promissory note payable to the order of P. X signs
M's name indicating that he signs for and on behalf of M.
However, X has no authority to bind M. The signature is also
inoperative and M is not liable to any holder.
Cases of forgery in general.
The cases of forgery may be divided as follows:
1) Forgery of promissory notes which may be subdivided into: (a)
Forgery of an indorsement on the note; and (b) Forgery of the
maker's signature.
2) Forgery of bills of exchange which may be subdivided into: (a)
Forgery of an indorsement on the bill; and (b) Forgery of the
drawer's signature; either 1) with acceptance by the drawee; or
2) without such acceptance but the bill is paid by the drawee.
Extent of the effect of forgery
Section 23 does not purport to declare the instrument totally void
nor the genuine signatures thereon inoperative. It is only the forged
or unauthorized signature that is declared to be inoperative. In other
words, rights may still exist and be enforced by virtue of such
instrument as to those whose signatures thereto are found to be
genuine.
Extent of the effect of forgery
A forged indorsement prevents any subsequent party from
acquiring any right as against any party whose name appears prior
to the forgery. Although rights may exist between and among
parties subsequent to the forged indorsement, not one of them can
acquire rights against parties prior to the forgery. Such an
indorsement cuts off the rights of all subsequent parties as against
parties prior to the forgery. However, the law makes an exception
to these rules where a party is precluded from setting forgery as a
defense. (Gempesaw v. Court of Appeals,supra.)
Illustration:
M makes a note payable to the order of P. P indorses it to A. X
obtains possession of the note fraudulently and indorses it to B, by
forging A's signature. B indorses to C. Thus, the indorsements are
as follows:
Pay to A (Sgd.) P
Pay to B (Sgd.) A (Forged by X)
(Sgd.) B
Illustration
(a) C cannot enforce the instrument against M and P because C's
rights against them are cut off by the forged signature of A
which is wholly inoperative. C could acquire rights against M
or P to the instrument only through the forged signature of A.
(b) Neither can C enforce the note against A because A's signature
is wholly inoperative. A has no privity with C. Under Section
23, C acquired no right to retain, discharge, or enforce payment
of the note under the forged signature of A.
Illustration
(c) But C may go against B whose signature is genuine and,
therefore, operative. B is a general indorser who warranted to C
that the instrument is genuine and was valid and subsisting at the
time of B's indorsement, (see Sees. 65 and 66.)
(d) Of course, B or C has a right of recourse against X, the forger.
(e) A can recover from M and P because his rights against them
were not affected by the forgery. The signatures of M and P are
genuine and they are liable to A on their contract.
Illustrative Cases (Assignment)
 Bianca - (Republic of the Phils, v. Equitable Banking
Corporation, 10 SCRA 8 [1964].)
 Sr. Jen - (Metropolitan Waterworks and Sewerage System v.
Court of Appeals, 143 SCRA 20 [1986].)
Submission: Next Friday
To do: Case Analysis (1-page)
“Generally, drawee bears loss from payment of forged check.”
The drawee who has paid upon forged signature is held to bear the
loss, because he has been negligent in failing to recognize that the
handwriting is not that of his customer. But it follows obviously
that if the payee, holder, or presenter of the forged paper has
himself been in default, if he has himself been guilty of a
negligence prior to that of the banker, or if by any act of his own he
has at all contributed to induce the banker's negligence, then he
may lose his right to cast the loss upon the banker.
Right of drawee to recover payment made
where drawer's signature was forged.
The rule adopted and followed in almost all American jurisdictions
as the doctrine of Price v. Neal (3 Burr 1354, 97 Eng. Rep. 871.) is
that as between equally innocent persons, the drawee who pays
money on a check or draft the signature on which was forged
cannot recover the money from the one who received it.
Acceptance prior to payment is not a prerequisite to the rule; and
the rule applies alike where payment is received without prior
acceptance and where it is paid after acceptance.
Right of drawee to recover payment made
where drawer's signature was forged.
1) Rule founded on estoppel and principle of natural justice. — The
grounds given for the rule include estoppel, actual or presumed
negligence of the drawee of not detecting the forgery, and the principle
of natural justice that as between two persons, one of whom must suffer,
the legal title shall prevail.
2) Rule founded on ground of public policy.—It is also declared that the
rule is one of policy of maintaining confidence in the security of
negotiable paper by making the time and place of acceptance or payment
the time and place for the final settlement, as between the drawer and the
holder, of the question of the genuineness of the drawer's signature.
Right of drawee to recover payment made
where drawer's signature was forged.
3) Responsibility of drawee bank. — It is a fundamental rule of
banking that when a bank receives money to be checked out by a
depositor, it is to be paid only as the depositor shall order. The bank
assumes this duty in receiving the deposit. If, therefore, it pays out
money otherwise than according to such order it is liable to the
depositor for the amount so paid. The bank thus assumes the
responsibility of seeing that the money gets to the party authorized
to receive it. Hence, if it pays money out on forged signature the
depositor being free from blame or negligence, it must bear the loss.
Right of drawee to recover payment made
where drawer's signature was forged.
(4) Allocation of loss between drawee bank and collecting bank.
— In a case where both the drawee bank and the representing or
collecting bank were guilty of negligence resulting in the
encashment of forged checks, the Supreme Court allocated the loss
and the costs of arbitration proceedings and litigation on a 60-40
ratio considering the comparative negligence of the two (2) banks.
Right of drawee to recover payment where
payee's or indorsees signature was forged.
(1) From the encasher or last indorser. —It is not supposed to be
the duty of the drawee bank of a check to ascertain whether the
signatures of the payee or indorsers are genuine or not. This is
because the indorser is supposed to warrant to the draw the
signatures of the payee and previous indorsers are genuine,
warranty not extending only to holders in due course.
Right of drawee to recover payment where
payee's or indorsees signature was forged.
(2) From the drawer or depositor. — As a rule, a drawee bank who
has paid a check on which an indorsement has been forged cannot
debit or charge the drawer's account for the amount of said check
and is not entitled to indemnification from the drawer. The risk of
loss must perforce fall on the drawee bank. (Associated Bank vs.
Court of Appeals, 67 SCAD 487,252 SCRA 620 [1996].) An
exception to this rule is where the drawer is guilty of such
negligence which causes the bank to honor such a check or checks.
Rights of parties in cases of forged
indorsements.
(1) Where note payable to order. —Where the note is payable to
order, the party whose indorsement is forged is not liable to any
holder ever a holder in due course. The indorsement, being forged,
is inoperative. The other parties, including the maker, prior to the
party whose signature is forged are also not liable to any holder.
The instrument being payable to order, it can be negotiated only by
indorsement completed by delivery. But since the indorsement is
forged, it is inoperative and, therefore, it cannot operate to transfer
any right or title over the instrument.
Illustration
M makes a note payable to P or order. P indorses the note to A. X finds it. X
indorses the note to B forging A's signature thereto.
(a) A, whose indorsement is forged, is not liable to B, whether B is a holder
in due course or not. Being forged, the indorsement is wholly inoperative.
(b) M and P, parties prior to A, whose signature is forged, are not also liable
to B. The indorsement of the note by A together with the delivery of the
same, is the only means through which B could acquire any right against
M and P under the instrument. But since the indorsement is forged, it is
inoperative. Consequently, no rights can be enforced by virtue of such
instrument.
2) Where note payable to bearer. — Where the note,
mechanically complete, is originally payable to bearer, the party
whose indorsement is forged is liable to a holder in due course, but
not to one who is not a holder in due course. The other parties,
including the maker, prior to the party whose signature is forged,
may also be held liable by one who is not a holder in due course.
The reason is that the instrument being originally payable to bearer,
it can be negotiated by mere delivery. (Sec. 30.)
In other words, indorsement is not necessary to the title of the
holder. Hence, even if the indorsement is forged, the forgery may
be disregarded. The forged indorsement does not prevent the
transfer of title since the holder may just strike out the forged
indorsement. (Sec. 48.) The only defense available is want of
delivery but this defense can be raised only against a holder not in
due course. (Sec. 16.)
Illustration
Suppose in the preceding example, the note is payable to bearer on its face and it
is delivered by M to P, who indorsed it to A. The note is found by X and is
indorsed by him to B by forging A's signature. B indorses the note to C who, in
turn, delivers without indorsement the note to D, a holder in due course.
In this case, the indorsement of P, A, and B are not necessary to vest ownership in
the note to D. Being originally payable to bearer, mere delivery is sufficient.
Hence, even if the indorsement of A is forged, A can be held liable to D.
For the same reason, M, the maker, and P, a party prior to A, whose signature is
forged, can also be held liable to D. D may just strike out the forged indorsement
of A Of course, D can enforce the note against B and C who are liable to their
warranties as indorsers.
Consideration
Consideration means an inducement to a contract, that is, the cause, price
or impelling influence which induces a contracting party to enter into the
contract. (Ogden, op. cit., p. 125.) It is the essential or more proximate
purpose a party has in view at the time of entering into the contract.

Sec. 24. Presumption of consideration. — Every negotiable instrument

is deemed prima facie to have been issued for a valuable consideration;
and every person whose signature appears thereon to have become a
party thereto for value.
Value
Sec. 25. Value, what constitutes. — Value Is any consideration
sufficient to support a simple contract. An antecedent or pre-
existing debt constitutes value; and is deemed such whether the
instrument is payable on demand or at a future time.
Valuable consideration in general.
(1) Value means valuable consideration. (Sec. 191.)
(2) Valuable consideration may "in general terms be said to consist
either in some right, interest, profit or benefit accruing to the
party who makes the contract, or some forbearance, detriment,
loss, responsibility, act, labor or service, on the other side.

Adequacy of consideration. A valuable consideration need not be

adequate. It is sufficient if it is a valuable one.
Illustration
Where P sells and delivers to M a piano worth P9,000.00 and M
issues to P a promissory note for P10,000.00, there is a valuable
consideration for the note, which is the piano.
In an action on the note, M cannot allege as a defense that the value
of the piano is not adequate for the amount of the note. The law
presumes that M is capable of managing his affairs and the mere
inadequacy of the consideration is not a sufficient ground for relief
Unless there is fraud, mistake or undue influence, (see Art. 1355,
Civil Code.)
Illustrations
(1) M owes P PI,000.00 payable today. M fails to pay in cash.
He issues a check for that amount to P who accepts the
check. Here, the consideration for the check is the pre-existing
debt of M.
(2) If X is the debtor and he fails to pay P the amount of PI,000.00,
the check issued by M in favor of P for the benefit of X rests on
a sufficient consideration, i.e.,the pre-existing debt of X.
Holder for Value
A holder for value is one who has given a valuable consideration
for the instrument issued or negotiated to him. The holder is
deemed as such not only as regards the party to 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.
Illustration
M issues a note to P, the payee, without consideration. P, also
without consideration, indorses it to A who, with value, indorses it
to B.
Under Section 26, B is deemed a holder for value not only as
regards A but also as regards M and P. If B is a holder in due course
(Sec. 52.), he may enforce payment for the full amount of the note
against M, P and A. (Sec. 57.) If B is not a holder in due course, M
can set up the defense of absence of consideration. (Sec. 58.)
Accommodation Party
An accommodation party is one who has signed the instrument as
maker, drawer, acceptor, or indorser, without receiving value
therefor, and for the purpose of lending his name to some other
person. Such a person is liable on the instrument to a holder for
value, notwithstanding such holder at the time of taking the
instrument knew him to be only an accommodation party.
Illustration
P is in immediate need of P30,000.00 but he cannot find anybody
to lend him the sum he needs. No one trusts him because he has no
credit He goes to M, a rich relative, who is willing to accommodate
him by letting him borrow on his (M's) credit. So M signs a
promissory note payable to P, receiving no consideration therefor. P
then indorses the note to the PNB (bank) which discounts the note
because of M's credit.
Illustration
In this case, the promissory note is an accommodation note, and P
is the accommodated party. P cannot enforce the note against M
should P pay PNB because P gave no consideration to M and he
was merely accommodated by M.
M may simply sign the promissory note payable to PNB to
accommodate P in order that P can borrow from PNB.
Negotiation
An instrument is negotiated when it is transferred from one person
to another in such manner as to constitute the transferee the holder
thereof. If payable to bearer, it is negotiated by delivery; if payable
to order, it is negotiated by the indorsement of the holder
completed by delivery.
Transfer is the process by which property is delivered by one
person to another completed by delivery.
Three methods of transferring a negotiable
instrument
(1) Issue.—It is the first delivery of the instrument, complete in
form, to a person who takes it as holder (Sec. 191.); it is the first
transfer of an instrument to a payee. A negotiable instrument's legal
life does not begin until it is issued by the maker or drawer to the
first holder
Three methods of transferring a negotiable
instrument
(2) Negotiation. — It ordinarily involves indorsement (in regard to
other than bearer paper) so that "negotiation" and "indorsement"
are often used interchangeably. Negotiation makes it possible for
the transferee to acquire a better right to a negotiable instrument
that the transferor had. Whether the holder is a holder in due course
depends upon factors other than the fact of negotiation (see Sec.
52.); and
Three methods of transferring a negotiable
instrument
(3) Assignment. — It is the less usual method/ which may or may
not involve an indorsement in the sense of a writing on the back of
the instrument. A bill or note, whether negotiable or non-
negotiable, may be transferred by assignment. By its nature, there
can be no "negotiation" of a non-negotiable instrument. Although it
may be transferred by indorsement and delivery, the assignee
acquired the instrument subject to the rules applicable to non-
negotiable paper
Negotiation and assignment distinguished.
(1) Negotiation refers only to negotiable instruments, while
assignment refers generally to an ordinary contract;
(2) In negotiation, the transferee is a holder, while in assignment,
the transferee is an assignee;
(3) A holder in due course is subject only to real defenses, while an
assignee is subject to both real and personal defenses (see Sec.
57-59.);
Negotiation and assignment distinguished.
(4) A holder in due course may acquire a better title or greater
rights under the instrument than those possessed by the transferor
or a prior party, while generally an assignee merely steps into the
shoes of the assignor;
(5) A general indorser warrants the solvency of prior parties, while
an assignor does not warrant the solvency of prior parties unless
expressly stipulated or the insolvency is known to him;
Negotiation and assignment distinguished.
(6) An indorser is not liable unless there be presentment and notice
of dishonor, while an assignor is liable even without notice of
dishonor; and
(7) Negotiation is governed by the Negotiable Instruments Law,
while assignment is governed by Articles 1624 to 1635 (on
assignment of credits) of the Civil Code.
Indorsement
Indorsement is the writing of the name of the payee on the
instrument with the intent either to transfer the title to the same, or
to strengthen the security of the holder by assuming a contingent
liability for its future payment, or both.
The payee by signing (indorsing) the instrument and delivering it to
another person (in payment of debt payee owes him or for any
other reason) becomes an indorser. The person who receives the
indorsed instrument is the indorsee. He can indorse the Instrument
to some else and thus become an indorser as well.
Indorsement
Indorsement alone without delivery conveys no title and creates
no holder. Indorsement in accordance with Section 191, paragraph
8 means an indorsement completed by delivery. It applies to both
bills and notes.
Kinds of Indorsement
1) As to the methods of negotiation:
(a) special (Sec. 34.); – specifies the person to whom or to whose
order the instrument is to be payable
(b) (b) blank, -specifies no indorsee and an instrument so indorsed
is payable to bearer and may be negotiated by mere delivery
Kinds of Indorsement
(2) As to the kind of title transferred:
 restrictive; – prohibits the further negotiation of the instrument;
constitutes the indorsee the agent of the indorser; or vests the title in
the indorsee in trust for or to the use of some other persons.
Ex. Pay to C only
Pay to C and no other person
Pay to C for collection, Sgd. B
Pay to X in trust for C
 non-restrictive. (Sec. 36.)
Kinds of Indorsement
3) As to scope of liability of indorser:
 qualified; - constitutes the indorser as a mere assignor of the title
to the instrument
Ex. Pay to A without recourse, indorser not holden
 unqualified or general. (Sees. 38,66.)
Kinds of Indorsement
4) As to presence or absence of limitations:
(a) conditional; - subject to a contingent event
Ex. Pay to JB if she passes the CPA BoardExams
(b) unconditional. (Sec. 39.)
CHECKS