Professional Documents
Culture Documents
Chapter 1: General Considerations: Abad - Avila.Cancino - Concepcion.Chu - Layno.Mercado - Prinsipe.Reyes H. (2S A.Y. 2010-2011)
Chapter 1: General Considerations: Abad - Avila.Cancino - Concepcion.Chu - Layno.Mercado - Prinsipe.Reyes H. (2S A.Y. 2010-2011)
Impliedly repealed the Code of Commerce except on provisions that are not inconsistent with the
NIL (e.g. rule on crossed checks)
The provisions of the NIL are only applicable if the instrument involved is negotiable. Otherwise,
the NIL can only be applied by analogy.
The obligation is deemed paid if the check has been cleared and credited to his account.
Impairment due to the fault of the creditor.
When negotiable instruments are transferred through negotiation, secondary contracts are
accumulated because the indorsers become secondarily liable not only to their immediate
transferees but also to any holder. It thus provides for greater security in dealing with such
instruments.
Commonly termed a draft. It is used to designate bills of exchange that are used in trade of
goods.
CHECK
It is necessary that a check is drawn on a deposit.
Otherwise, there would be fraud.
Death of
knowledge
the banker
Must be
reasonable
Promissory Notes: A negotiable promissory note is an unconditional promise in writing made by one
person to another, signed by the maker, engaging to pay on demand or at a fixed determinable future
time, a sum certain in money to order or to bearer. Where a note is drawn to the makers own order, it is
not complete until it is indorsed by him.
Dean Sundiang: when the situation contemplated in the last sentence occurs, the person who signs
assumes to personalities both as a maker and as an indorser. In what capacity is he then liable? In such
case, he becomes liable as a maker. The requirement of having to indorse does not deviate his very
capacity as the maker of the instrument. Furthermore, the maker has a more onerous liability compared
to that of an indorser.
Bills treated as Notes (Sec. 130)
1. When the drawer and the drawee are the same person.
2. The drawee is a fictitious person.
3. The drawee has no capacity to contract.
Bills vs. Notes
PROMISSORY NOTE
Contains an unconditional
promise.
There are 2 parties on its
face
The person who signs it is
the MAKER.
The person who signs it is
PRIMARILY LIABLE
The
person
primarily
liable is the maker
There
is
only
one
presentment:
for
payment.
BILL OF EXCHANGE
Contains an unconditional
order.
There are 3 parties on its
face.
The person who signs it is
the DRAWER
The person who signs it is
SECONDARILY LIABLE
The person primarily liable
is the DRAWEE-ACCEPTOR
There
are
2
presentments:
1. For acceptance
2. For payment
Maker: Person who promises to pay according to the tenor of the note.
Payee: Person who is to receive payment from the maker.
Drawer: Person who draws the bill and orders the drawee to pay a sum certain in money.
Drawee: the one being commanded to pay the bill. NOTE HOWEVER, the drawee only becomes
party to the transaction upon acceptance of the BOE. Otherwise, he is not liable at all.
Indorser: Persons who transfer the instrument through indorsement and completed by delivery.
Holder: Payee or indorsee of a bill or note who is in possession of it or the bearer thereof.
Bearer: person in possession of bill or note which is payable to bearer.
1. Preparation and signing complete with all the requisites provided for in Section 1 of NIL.
2. Issuance: first delivery of the instrument to the payee (from maker to payee/bearer or from
drawer to the payee/bearer).
3. Negotiation: transfer from one person to another so as to constitute the transferee a holder.
4. Presentment for acceptance for certain kinds of BOE the bill of exchange shall be presented
to the drawee so that the latter will signify his agreement to the order of the drawer to pay.
5. Acceptance: written assent of the drawee to the order (act which makes the drawee a party to
the instrument, thus making him primarily liable - Sundiang).
CHAPTER 2: Negotiability
Requisites of Negotiability (Section 1, NIL)
Keyword: WUPOA
Acceptance
Acceptance of an instrument is not important in the determination of its negotiability. The nature of
acceptance is important only in the determination of the liabilities of the parties involved.
Indorsement
The negotiability of an instrument is not affected by the indorsement placed therein.
EFFECT OF ESTOPPEL
REQUISITE OF NEGOTIABILITY
Requisite #1: IN WRITING AND SIGNED BY THE MAKER OR THE DRAWER
It must be in writing. It may be printed, in ink or in pencil, and it may be written in any material
that substitutes paper like cloth, leather, or parchment.
Signed: marked by any means as long as they are adopted as the signature of the signer.
Requisite #2: IT MUST CONTAIN AN UNCONDITIONAL PROMISE OR ORDER TO PAY A SUM CERTAIN IN
MONEY
Unconditional Payment/Order
The promise in a promissory note is the undertaking made by the maker to pay a sum certain in money to
the payee or the holder. The order in a bill is a command made by the drawer addressed to the drawee
ordering the latter to pay the payee or the holder a sum certain in money.
The word promise or order need not appear to satisfy the requirements of Section 1(b) of NIL.
The promise or order must be unconditional. An unqualified order or promise to pay is
unconditional within the meaning of NIL although it is coupled with (Sec. 3, NIL):
1. An indication of a particular fund out of which reimbursement is to be made or a particular
account to be debited with the amount.
2. A statement of the transaction which gives rise to the instrument.
Conditional (therefore not negotiable):
1. An order or promise to pay out of a particular fund in this case, payment shall be subject
to the availability or sufficiency of funds.
2. An instrument payable upon a contingency.
Money need not be legal tender. An instrument is still negotiable although the amount to be paid is
expressed in currency that is not legal tender, so long as it is expressed in MONEY.
If the obligor like the maker is given the option to deliver something in lieu of money, then the
instrument is not negotiable.
If the instrument gives the holder an election to require something to be done in lieu of payment
in money, the instrument is still negotiable.
A SUM CERTAIN: If the amount that is to be unconditionally paid by the maker or drawee can be
determined from the face of the instrument even if it requires mathematical computation.
Section 2: A sum is certain although it is to be paid
a) with interest; or
b) by stated installments; or
c) by stated installments, with a provision that upon default in payment of any installment or
of interest, the whole obligation shall become due; or
d) with exchange, whether at a fixed rate or at a current rate; or
e) with costs of collection or an attorneys fee, in payment shall not be made upon maturity.
Stated Installments: the dates of each installment must be fixed or at least determinable and the
amount to be paid for each installment must be stated.
Acceleration clauses:
The instrument is not negotiable because it is dependent upon the holders whims and
caprice without the fault of the maker. (Query: can such instruments be considered
instruments payable on demand, thus, not affecting the negotiability of the instrument?)
Extenion Clauses
3.
Order Instruments
Section 8. 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.
Requisite #5: IDENTIFICATION OF THE DRAWEE
Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with
reasonable certainty. The holder must know to whom he should present it for acceptance and/or for
payment, otherwise, the purpose of negotiable instrument as a tool in commercial dealings will be greatly
hampered.
A bill may be addressed to more than one drawee jointly, whether they are partners or not; but not to two
or more drawees in the alternative or in succession, (Sec. 128).
OMISSIONS AND PROVISIONS THAT DO NOT AFFECT NEGOTIABILITY
Section 6. Omissions; seal; particular money. - The validity and negotiable character of an instrument are
not affected by the fact that:
it is not dated; or
a)
b)
c)
d)
does not specify the value given, or that any value had been given therefor; or
does not specify the place where it is drawn or the place where it is payable; or
bears a seal; or
designates a particular kind of current money in which payment is to be made.
The instrument is still negotiable if it is not dated. It should be noted, however, that there are cases where
the date of the instrument is necessary and in the absence thereof can be inserted in the instrument.
Section 13. When date may be inserted. - Where an instrument expressed to be payable at a fixed period
after date is issued undated, or where the acceptance of an instrument payable at a fixed period after
sight is undated, any holder may insert therein the true date of issue or acceptance, and the instrument
shall be payable accordingly. The insertion of a wrong date does not avoid the instrument in the hands of a
subsequent holder in due course; but as to him, the date so inserted is to be regarded as the true date.
Other additional provisions that do not affect the negotiability of an instrument:
Sec. 5. Additional provisions not affecting negotiability. - An instrument which contains an order or
promise to do any act in addition to the payment of money is not negotiable. But the negotiable character
of an instrument otherwise negotiable is not affected by a provision which:
a) authorizes the sale of collateral securities in case the instrument be not paid at maturity; or
b) authorizes a confession of judgment if the instrument be not paid at maturity; or
c) waives the benefit of any law intended for the advantage or protection of the obligor; or
d) gives the holder an election to require something to be done in lieu of payment of money.
But nothing in this section shall validate any provision or stipulation otherwise illegal.
There must be a writing of some kind for if the instrument were not in writing there would nothing to be
negotiated or to pass from hand to hand.
It may be in ink, print or pencil on a parchment, cloth leather or any substitute of paper.
It must be signed by the maker or drawer; full name may be indicated but the surname is enough
It may also consist of initials and numbers.
Where the name is not signed the holder must prove that what is written is intended as a signatureof the
person sought to be charged.
Signature may be printed, typewritten, stamped, engraved, photographed or lithographed; but in every case
there must be a showing that the party have adopted and used such signature.
Where signature found: location of signature is not material what is important is that it appears therefrom
that the person intended to make it his own.
(b) Must contain an unconditional promise or order to pay a sum certain in money;
Bill of exchange
A bill must contain an order to pay, a bill is an instrument demanding a right.
The word order may not necessarily be used, any words equivalent may suffice to make an instrument a bill of
exchange.
Mere authorization to pay is not a negotiable instrument.
A mere request to pay is not a negotiable instrument.
Promissory note
The promise to pay must be in the instrument itself although it is not necessary to use the word promise.
It is enough that (1) words of equivalent meaning are used or (2) the promise is implied from promissory
words contained in the instrument.
Note: the promise to pay cannot be implied from the existence of a debt.
Words equivalent to promise: agree, will pay, shall pay and the like.
Unconditional promise or order to pay
Amount of money to be paid must be determinable by inspection and must be stated plainly in the face of the
instrument.
Like the denomination of money it must be stated in the body of the instrument.
All that is required is that the principal should be certain.
Sum payable must be in money only. Bonds, stocks, state paper, scrip, checks, foreign bills are not negotiable.
Reason why NI should be in money: money is the one standard of value in actual business. All other
commodities may rise and fall in value but in theory, at least, money measures this rise and fall and remains
the same.
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with
reasonable certainty.
The formalities required by the NI are essential for the security of mercantile transactions. They distinguish the
negotiable from non-negotiable.
Where the instrument does not comply with the requirement of section 1 of the negotiable instruments law,
the provision of the NIL will not govern.
How negotiability determined: 1) NIL sec 1 2) considering the whole of the instrument 3) what appears on the
face of the instrument and not elsewhere.
The requirement lacking may not be supplied by using a separate instrument containing that requirement
which is lacking.
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:
(a) with interest; or
The fact that the sum payable is to be paid with interest does not render the sum uncertain.
The sum is certain when the principal sum is certain.
Where interest is stipulated but not specified the rate is determined to be the legal rate.
Interest shall earn interest from the time it is judicially demanded.
(c) by stated installments, with a provision that, upon default in payment of any installment or of interest,
the whole shall become due; or
(d) with exchange, whether at a fixed rate or at the current rate; or
(e) with costs of collection or an attorney's fee, in case payment shall not be made at maturity.
Note: after the date of maturity the instrument will no longer be negotiable in the full commercial sense that is in the
sense that any transferee acquiring it would acquire the instrument after it is overdue. The transferee will not be
considered a holder in due course and hold the instrument subject to the defences as if it was non-negotiable.
Atty. Fee must be reasonable. The written amount shall govern unless the court founds it unreasonable and
unconscionable.
Atty. Fees non recoverable subject to some exceptions provided by law.
Sec. 3.When promise is unconditional. - An unqualified order or promise to pay is unconditional within the
meaning of this Act though coupled with:
The problem which is sought to be solved by this section is whether or not the indication of a particular fund
or particular account or the statement of the transactions which gives rise to the instrument would make
promise or order conditional.
An order or promise to pay out of a particular fund is not unconditional but if the order or promise is coupled
only by a source where reimbursement in case of non-payment it is still unconditional.
Where the payment is out from the funds indicated, the payment is subject to the condition that the funds
indicated is sufficient.
Instruments are not issuede without any transactions which they are based.
Where the promise or order is made subject to the terms and conditions of the transaction stated the
instrument is rendered non-negotiable.
An instrument is payable at a determinable future time within the meaning of this act, which is expressed to
be payable at a fixed period after date or after sight.
After sight means after the drawee has seen the instrument upon presentment for acceptance.
Acceleration clause: these provisions make it possible for the maker to pay the instrument at an earlier
date or make it possible for the holder to require payment of the instrument at an earlier date.
Kinds: 1) that which contain acceleration clauses on the makers default in payment of instalments or of
interest or on the happening of the extrinsic event; 2) or contain in notes secured by collateral a provision
that the maker shall supply additional collateral in case of depreciation in the value of the original deposits
with the holders right to declare the note due immediately on failure to make good the depreciation or 3)
contain provisions for acceleration where holder deems himself insecure.
Conflicting opinion as to the second: 1) those who maintained that such stipulation renders the
instrument non-negotiable argue that the time for payment becomes uncertain and indefinite. If the maker
fails when demanded to furnish additional security to the satisfaction of the holder, the note matures at once.
If the holder is not satisfied with the additional security the note matures at once and thus the time at which
it may mature would depend upon the time at which the holder declared himself dissatisfied with the security
delivered by the maker. 2) Those who maintain that the stipulation in question does not render the
instrument non-negotiable. This view is from the standpoint of expediency as encouraging circulation and of
business custom on account of their common acceptance by the commercial world such clauses should be
interpreted as not affecting negotiability.
Conflict of opinion as to third: 1) it has been held that a note is rendered non-negotiable where it
is payable at a fixed future time, but with an option on the part of the holder to declare it due and
payable before maturity whenever he deems it insecure; 2) it is submitted that these cases in
holding an instrument payable at a fixed time but accelerable at the option of the payee or holder
non-negotiable are directly contrary to the plain meaning of this section.
(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.
a promise of the maker to furnishadditional collateral will render the note non-negotiable, as that would be
an additional act to promise to pay money.
(c) waives the benefit of any law intended for the advantage or protection of the obligor; or
(d) gives the holder an election to require something to be done in lieu of payment of money.
But nothing in this section shall validate any provision or stipulation otherwise illegal.
Sec. 6.Omissions; seal; particular money. - The validity and negotiable character of an instrument are not
affected by the fact that:
(a) it is not dated; or
gen rule: omission of date does not render the instrument non-negotiable
exp: when date is necessary to fix date of maturity
(b) does not specify the value given, or that any value had been given therefor; or
gen rule: no value specified does not affect NI; Reason: value is presumed
(c) does not specify the place where it is drawn or the place where it is payable; or
(d) bears a seal; or
(e) designates a particular kind of current money in which payment is to be made.
But nothing in this section shall alter or repeal any statute requiring in certain cases the nature of the
consideration to be stated in the instrument.
Sec. 7.When payable on demand. - An instrument is payable on
demand:
(a) When it is so expressed to be payable on demand, or at sight, or on presentation; or
(b) In which no time for payment is expressed.
Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing,
accepting, or indorsing it, payable on demand.
Note: payable to order means that a person promises to pay to the order of a specific person or to the duly
authorized agent of that person.
There is a necessity of paying the payee: reason: if there is no payee where the instrument is to be
payable to his order no one could indorse the instrument. Consequently, it is useless to consider it
negotiable.
(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
When it is payable to the order of a fictitious person or non-existing person it is payable to bearer if such fact
was known to the person making it so payable.
Elements: 1) the payee named must be fictitious or non existing; 2) it must be known to the person making
it so payable.
The name is fictitious when it is feigned or pretended and a non-existing person one who does not exist in the
sense that he was not intended to be the payee by the drawer
Note: if the agent has no authority to execute the instrument himself the knowledge of the principal is
controlling. If principal has no knowledge the instrument will not apply as to the principal.
AngTekLian v. CA: Held: under the NIL a check drawn payable to cash is payable to bearer and the bank
masy pay to the person presenting it for payment.
(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.
Sec. 10.Terms, when sufficient. - The instrument need not follow the language of this Act, but any terms
are sufficient which clearly indicate an intention to conform to the requirements hereof.
Sec. 11.Date, presumption as to. - Where the instrument or an acceptance or any indorsement thereon is
dated, such date is deemed prima facie to be the true date of the making, drawing, acceptance, or
indorsement, as the case may be.
This provision applies to three cases: 1)the instrument contains the date of the issue; 2)
acceptance is dated; 3) indorsement is dated
Sec. 12.Ante-dated and post-dated. - The instrument is not invalid for the reason only that it is ante-dated
or post-dated, provided this is not done for an illegal or fraudulent purpose. The person to whom an
instrument so dated is delivered acquires the title thereto as of the date of delivery.
Limitation on ante dating or post-dating: when it is done for fraudulent and illegal purposes.
Sec. 13.When date may be inserted. - Where an instrument expressed to be payable at a fixed period after
date is issued undated, or where the acceptance of an instrument payable at a fixed period after sight is
undated, any holder may insert therein the true date of issue or acceptance, and the instrument shall be
payable accordingly. The insertion of a wrong date does not avoid the instrument in the hands of a
subsequent holder in due course; but as to him, the date so inserted is to be regarded as the true date.
Date is not necessary for the negotiability of the instrument. However date may be necessary to determine
the date of maturity but not for negotiability.
o
Date is important to determine when interest is to run
o
Date is necessary to determine whether a party has acted within reasonable time.
Effects of inserting a wrong date: knowingly inserting the wrong date in an undated instrument will avoid the
instrument as to the party inserting the wrong date.
Insertion of the wrong date does not avoid the instrument in the hands of a holder in due course
Interpretation of Courts of the United States of the provisions of NIL can be applied in this
jurisdiction.
If there is no provision of the NIL or the Code of Commerce, the provisions of the the Negotiable
Instruments Law (U.S.) or the Bill of Exchange Act of 1882 can be applied.
Opinions and comments of authorities or legal writers on the provisions of the Uniform Negotiable
Instruments Law or the BEA 1882 may also be applied in this jurisdiction.
Negotiation: The Transfer of the instrument from one person to another as to constitute the
transferee a holder thereof.
Assignment: The transferee is an assignee who merely steps into the shoes of the transferor.
Applicable
Law
Type
of
transaction
Nature
of
transferee
Possibility to
become
a
holder in due
course
Rights
acquired
Availability of
personal
defenses
NEGOTIATION
Negotiable
Instruments Law
Negotiable
Instruments only
Holder
course
YES
in
due
The
transferee
holder
may
acquire
rights
more than that of
the transferor if
he is a holder in
due course
The
transfereeholder may be
free
from
personal defenses
if he is a holder in
due course
ASSIGNMENT
Civil Code
Contracts
in
general or other
assignable rights.
Mere assignee
NEVER
Transferee
merely steps in
to the shoes of
the transferor
Transferee
is
always subject to
personal
defenses.
SUBSEQUENT NEGOTIATION
Section 30. What constitutes negotiation. - An instrument is negotiated when it is transferred from one
person to another in such manner as to constitute the transferee the holder thereof.
a) If payable to bearer, it is negotiated by delivery;
b) if payable to order, it is negotiated by the indorsement of the holder and completed by delivery.
Indorsement of Bearer Instrument
Where the holder of the instrument payable to his order transfers is for value without indorsing it,
the transfer vests in the transferee such title as transferor had therein, and the transferee acquires
in addition, the right to have the indorsement of the transferor.
For the purpose of determining whether the transferee is a holder in due course, the negotiation
takes effect as of the time the indorsement is actually made.
The transaction is an equitable assignment and the transferee acquires the instrument subject to the
defenses and equities available among prior parties.
In addition, the presumption of sufficiency of consideration and title that is enjoyed by the holders will not
be enjoyed by the transferee contemplated under Sec. 49.
D. INDORSEMENT
Section 31. Indorsement; how made. - The indorsement must be written on the instrument itself or upon
a paper attached thereto. The signature of the indorser, without additional words, is a sufficient
indorsement.
Where indorsement should be placed:
1.
2.
Kinds of Indorsement
1.
2.
Blank Indorsement: no indorsee is specified and it is done by affixing the indorsers signature.
Special Indorsement: Designates the indorsee. (e.g. pay to x)
Note: the holder may convert a blank indorsement into a special indorsement by writing over the
signature of the indorser in blank any contract consistent with the character of the indorsement (Sec.
35).
3.
4.
5.
Qualified Indorsement: constitutes the indorser a mere assignor of the title to the instrument. It
may be made by adding to the indorsers signature the words without recourse. Such an
indorsement does not impair the negotiable character of the instrument.
Conditional Indorsement (Sec. 39): the party required to pay the instrument may disregard the
condition and make payment to the indorsee or his transferee whether the condition has been
fulfilled or not.
Restrictive indorsement (Sec. 36): An indorsement is restrictive which either:
a. Prohibits the further negotiation of the instrument; or
b. Constitutes the indorsee the agent of the indorser; or
c. Vests the title in the indorsee in trust for or to the use of some other persons.
Indorsement must be of the entire instrument. Accordingly, an indorsement of a part of the instrument does not
operate as negotiation thereof.
Effect of partial indorsement when unauthorized. It does not operate as an indorsement, but it may constitute a
valid assignment binding between the parties. The person to whom the instrument is indorsed would not be considered
an indorsee but merely as assignee and would therefore take the instrument subject to the defenses available between
the original parties.
Exception. But where the instrument has been paid in part, it may be indorsed as to the residue.
Transfer of two or more indorsees severally. An indorsement which purports to transfer the instrument to two or
more indorsees severally does not operate as a negotiation of the instrument.
Sec. 33 Kinds of indorsement. - An indorsement may be either special or in blank; and it may also be either restrictive
or qualified or conditional.
Kinds of indorsement. (1) special, (2) in blank, (3) absolute, (4) conditional, (5) restrictive, (6) qualified, (7) joint,
(8) successive, (9) irregular, (10) facultative.
Sec. 34 Special indorsement; indorsement in blank. - A special indorsement specifies the person to whom, or to whose
order, the instrument is to be payable, and the indorsement of such indorsee is necessary to the further negotiation of
the instrument. An indorsement in blank specifies no indorsee, and an instrument so indorsed is payable to bearer, and
may be negotiated by delivery.
How further negotiated.
(1) Where the instrument is originally payable to order and it is negotiated by the payee by special indorsement, it can
be further negotiated by the indorsee by indorsement completed by delivery;
(2) Where the instrument is originally payable to order and it is negotiated by the payee by blank indorsement, it can
be further negotiated by the holder by mere delivery;
(3) Where the instrument is originally payable to bearer, it can be further negotiated by mere delivery, even if the
original bearer negotiated it by special indorsement.
Sec. 35 Blank indorsement; how changed to special indorsement. - The holder may convert a blank indorsement into a
special indorsement by writing over the signature of the indorser in blank any contract consistent with the character of
the indorsement.
Limitation upon conversion of blank indorsement. The holder must not write any contract not consistent with the
indorsement, that is, the contract so written must not change the contract of the blank indorser.
Sec. 36 When indorsement restrictive. - An indorsement is restrictive which either:
(a) Prohibits the further negotiation of the instrument; or
(b) Constitutes the indorsee the agent of the indorser; or
(c) Vests the title in the indorsee in trust for or to the use of some other persons.
But the mere absence of words implying power to negotiate does not make an indorsement restrictive.
Indorsee agent of the indorser. This is known as the agency type of restrictive indorsement.
Effect of omission of words of negotiability. Under the law, mere absence of words implying power to negotiate
does not make an indorsement restrictive. But while the omission of words of negotiability in the indorsement does not
affect the negotiability of the instrument, such omission in the body thereof will render the instrument non-negotiable.
Sec. 37 Effect of restrictive indorsement; rights of indorsee. - A restrictive indorsement confers upon the indorsee the
right:
Sec. 38 Qualified indorsement. - A qualified indorsement constitutes the indorser a mere assignor of the title to the
instrument. It may be made by adding to the indorser's signature the words "without recourse" or any words of similar
import. Such an indorsement does not impair the negotiable character of the instrument.
How qualified indorsement is made. A qualified indorsement is made by adding to the indorsers signature the
words without recourse, sans recours, indorser not holden, with intent to transfer title only, and not to incur
liability as indorser, or at the indorsees own risk.
Effect of qualified indorsement. It constitutes the indorser a mere assignor of the title to the instrument. Without
recourse means without resort to a person who is secondarily liable after the default of the person who is primarily
liable.
Qualified indorser has limited secondary liability. He is secondarily liable on his warranties as an indorser under
Section 65, that is, the qualified indorser is liable if the instrument is dishonoured by non-acceptance or non-payment
due to (1) forgery; (2) lack of good title on the part of the indorser; (3) lack of capacity to indorse on the part of the
prior parties; (4) the fact that, at the time of the indorsement, the instrument was valueless or not valid and he knew
of that fact.
Effect of qualified indorsement on negotiability. A qualified indorsement does NOT impair the negotiable character
of the instrument.
Sec. 39 Conditional indorsement. - Where an indorsement is conditional, the party required to pay the instrument may
disregard the condition and make payment to the indorsee or his transferee whether the condition has been fulfilled or
not. But any person to whom an instrument so indorsed is negotiated will hold the same, or the proceeds thereof,
subject to the rights of the person indorsing conditionally.
Absolute indorsement. One by which the indorser binds himself to pay, upon no other condition than the failure of
prior parties to do so and upon due notice to him of such failure.
Conditional indorsement. An indorsement subject to the happening of a contingent event, that is, an event that may
or may not happen, or a past event unknown to the parties.
Right to disregard conditions / Obligations of conditional indorsee. The maker MAY disregard the condition and
pay the indorsee even if the condition has not been fulfilled. Such payment will discharge him from liability on the
instrument. However, the indorsee does not immediately acquire ownership over the sum. The indorsee must hold it in
trust while the condition is not fulfilled. It is only upon the fulfilment of the condition that such ownership over the
proceeds of the note is absolutely acquired by the conditional indorsee.
Effect of conditional indorsement on negotiability. A conditional indorsement does not render an instrument nonnegotiable. But if the condition is on the face of the instrument, making the order or promise to pay conditional, the
condition renders it non-negotiable as the promise or order therein would not be unconditional.
Sec. 40 Indorsement of instrument payable to bearer. - Where an instrument, payable to bearer, is indorsed specially, it
may nevertheless be further negotiated by delivery; but the person indorsing specially is liable as indorser to only such
holders as make title through his indorsement.
Application. This section applies only to instruments which are originally payable to bearer. It does NOT apply to
instruments originally payable to order, even when they become payable to bearer because the only or last indorsement
is in blank.
Negotiation of instrument payable to bearer but specially indorsed. An instrument which is originally payable to
bearer is always payable to bearer. Hence, even when specially indorsed, it can be negotiated by mere delivery.
CHAPTER 5: Holders
Definition: A holder means the payee or indorsee of a bill or note who is in possession of it or the bearer
thereof.
1. Holder of an order instrument: PAYEE or INDORSEE;
2. Holder of a bearer instrument: BEARER
RIGHTS OF HOLDERS IN GENERAL
Sec 51: Every holder of a negotiable instrument may sue thereon in his own name; and payment to him in
due course discharges the instrument.
It is not necessary that the holder is a holder in due course before he can enforce payment especially if
there are no defenses available to the parties.
The only disadvantage of a holder not in due course is that the instrument is subject to defenses as if it
were non-negotiable.
REQUISITES OF A HOLDER IN DUE COURSE (SEC 52):
A holder is a holder in due course if he has taken the instrument under the following conditions:
1. That it is complete and regular upon its face;
2. That he became the holder of it before it was overdue and without notice that it has been
previously dishonoured, if such was the fact;
3. That he took it in good faith and for value;
4. That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or
defect in the title of the person negotiating it.
Holder
It is actually the first requirement under Section 52 to be a holder. If a possessor of a negotiable
instrument is not a holder, he can never be a holder in due course.
Complete and Regular
2.
3.
A holder in due course holds the instrument free from any defect of title of prior parties, and free
from defenses available to prior parties among themselves, and may enforce payment of the
instrument for the full amount thereof against all parties liable thereon.
a. A holder in due course is free from personal defenses.
b. A holder in due course is no free from real defenses
A holder no in due course is subject to personal and real defenses.
the law does not impose on a holder the obligation to inquire into the infirmity in the instrument or
defect of the title of the person negotiating it to him. However, failure to make inquiry, when
circumstances indicate defect, renders the holder not a holder in due course. Gross negligence
may amount to legal absence of good faith (De Ocampo vs. Gatchalian, 3 SCRA 596).
SHELTER RULE
General Rule: if a holder is not a holder in due course, he is subject to the same defenses as if it were
non-negotiable.
Exception: a holder who is not a holder in due course but he derived from his title from a holder in due
course.
If he was a previous holder not in due course who repurchased the instrument either personally or
through an agent.
Reacquisition of the instrument.
1
2
One composed of various parts, each part being numbered, and containing a reference to other
parts, all of which parts constitute but one bill.
Purpose.
Sec. 179. Right of holders where different parts are negotiated. - Where two or more parts of a
set are negotiated to different holders in due course, the holder whose title first accrues is, as
between such holders, the true owner of the bill. But nothing in this section affects the right of
a person who, in due course, accepts or pays the parts first presented to him.
Suppose B, payee, wants to raise P4,000. In violation of his rights, he negotiates the first part
of the bill to C and the second part to D, both of whom are holders in due course.
Who is the true owner of the bill?
If B negotiates to C on January 3, 1950 and to D on January 5, 1950, C is the true owner, as Cs title
accrues first.
BUT, if D succeeds in presenting his part of the bill for acceptance or payment, and X, the drawee, accepts
or pays the second part in due course, X is protected and X can refuse to accept Cs part of the bill.
Sec. 180. Liability of holder who indorses two or more parts of a set to different persons. Where the holder of a set indorses two or more parts to different persons he is liable on every
such part, and every indorser subsequent to him is liable on the part he has himself indorsed,
as if such parts were separate bills.
Liability of holder who indorses two or more parts. (Continuation of illustration under note
1178)
B is liable on both parts as if there are two bills, on the first to C and on the second to D. In other
words, as a result of his negotiation of the two parts, B is liable for a total of P4,000. But A, the drawer, or
X, the drawee, is liable only on one part or for P2,000 unless the drawee accepts both parts.
Suppose that C and D respectively negotiate the parts they have to E, the first part, and f, the
second part. C is liable to E for the part he indorsed to E and D is liable to F for the part he indorsed to F.
Sec. 181. Acceptance of bill drawn in sets. - The acceptance may be written on any part and it must be
written on one part only. If the drawee accepts more than one part and such accepted parts negotiated to
different holders in due course, he is liable on every such part as if it were a separate bill.
Drawee must accept only one part.
If he accepts both parts, and they are negotiated to holders in due course, he is liable on evey such
part as if it were a separate bill, that is for a total of P4,000. But he can ask reimbursement from A,
drawer only on one part, that is, P2,000, because the order of the drawer to him is to pay only one part,
Subject to the exceptions in Sections 180, 181, and 182, if one part is discharged, the whole bill is
discharged.
Reason: The bill constitutes only one bill.
Example: Suppose that X, acceptor, pays the first part of which he accepted. The second and third parts
are also discharged.
Section 58. When subject to original defences. In the hands of any holder other than a holder in due
course, a negotiable instrument is subject to the same defences as if it were non-negotiable. But a holder
who derives his title through a holder in due course, and who is not himself a party to any fraud or
illegality affecting the instrument, has all the rights of such former holder in respect of all parties prior to
the latter.
Rights of holder not in due course
1. He may sue on the instrument in his own name; (2) He may receive payment, and if payment is in due course, the
instrument is discharged. (3) He holds the instrument subject to the same defences as if it were non-negotiable; (4)
But a holder not in due course who derives his title through a holder in due course and who is not a party to any fraud
or illegality affecting the instrument, has all the rights of such former holder in respect of all parties prior to the latter.
Holder acquiring from holder in due course
Requisites:
1. That he derived his title from a holder in due course; and (2) that he was not himself a party to any fraud or illegality
affecting the instrument
A purchaser from a holder in due course is entitled to recover against prior parties even though he has notice
of the defences, or notice of maturity of a negotiable certificate of deposit, or with knowledge of the equities
In order that a holder who derives his title form a holder in due course may recover on the instrument, it is
incumbent upon him to show that the person through whom he derives his title was a holder in due course
As to one not a holder in due course reacquiring from holder in due course. If the original payee of a
note unenforceable for lack of consideration repurchases the instrument after transferring it to a holder in due
course, the paper again becomes subject in the payees hands to the same defences to which it would have
been subject as if the paper had never passed through the hands of a holder in due course. The same is true
where the instrument is retransferred to an agent of the payee.
Section 59. Who is deemed holder in due course. Every holder is deemed prima facie to be a holder in due
course; but when it is shown that the title of any person who has negotiated the instrument was defective,
the burden is on the holder to prove that he or some person under whom he claims acquired the title as
holder in due course. But the last-mentioned rule does not apply in favor of a party who became bound on
the instrument prior to the acquisition of such defective title.
In whose favor presumption arises. The presumption expressed in this section arises only in favor of a person who
is a holder in the sense defined in Section 191, that is, a payee or indorsee who is in possession of the draft, or the
bearer thereof. In order to be a holder, one must be in possession of the note or the bearer thereof. However, when the
instrument is not payable to the holder thereof or to bearer, there is said to be a defect in the title of the holder and the
rule that a possessor of the instrument is prima facie a holder in due course does not apply.
Presumption not applicable when the holders title was defective or suspicious. As holders title was defective
or suspicious, it cannot be stated that the payee acquired the check without knowledge of said defect in holders title,
and for this reason, the presumption that he is a holder in due course or that it acquired the instrument in good faith
does not exist.
Reason for the rule. The guilty maker or holder of an instrument vitiated by fraud or illegality will naturally
seek to put it in the hands of some other person in order to cut off the defense to which the instrument is
subject, and a presumption arise against the bona fide of the transfer
Engages that if the instrument is dishonoured ad proper proceedings are brought, he will pay to
the party entitled to be paid.
The accommodation party lends his name to the accommodated party. He lends his name to enable the
accommodated party to obtain credit or to raise money. He receives no part of the consideration for the
instrument but assumes liability to the other parties thereto. It is not a valid defense that the
accommodation party did not receive any valuable consideration when he executed the instrument.
Surety of Accommodated Party
By lending his name, the accommodation party, is in effect, a surety of the accommodated party.
Thus, if he is an accommodation indorser, he is secondarily liable as an accommodation indorser and he
cannot make the holder recover directly from the accommodated party. His only recourse is to seek
reimbursement from the accommodated party.
Irregular Indorser
Although the law does not state that all irregular indorsers are accommodation parties, they are usually
accommodation parties.
Definition of an Irregular Indorser:
A person, not otherwise a party to an instrument, who placed thereon his signature in blank
before delivery.
Prof. Ogden: the irregular or anomalous indorser is one who indorses the instrument in an
unusual, singular or peculiar manner; it is irregular and an anomaly in the law.
If the instrument is payable to the order of a third person, he is liable to the payee and to all
subsequent parties.
If the instrument is payable to the order of the maker or drawer, or is payable to bearer, he is
liable to all parties subsequent to the payee.
If he signs for accommodation of the payee, is liable to all parties subsequent to the payee.
A joint and several accommodation party such as an accommodation maker may demand from the
principal debtor reimbursement for the amount that he had paid to the payee;
A joint and several accommodation maker who pays on the said promissory note may directly
demand reimbursement from his co-accommodation maker without first directing his action
against the principal debtor provided that:
a. He made payment by virtue of a judicial demand, or
b. A principal debtor is insolvent.
Liabilities of Corporations
The rule on the liability of an accommodation party under Sec. 29 of the NIL does not apply to
corporations.
Liability of two or more makers. When two or more makers sign jointly and severally, each of them is
individually liable for the payment of the full amount of their obligation even if one of them did not receive part
of the value given therefor, a he would be considered an accommodation party.
Payees existence etc. Aside from engaging to pay the instrument according to its tenor, the maker also
admits the existence of the payee and his then capacity to indorse. The maker consequently is precluded from
setting up the following defences: (1) that the payee is a fictitious person because, by making the note, he
admits that the payee exists; and (2) that the payee as insane, a minor, or a corporation acting ultra vires
because, by making the note, he admits the then capacity of the payee to indorse.
Section 61. Liability of drawer. The drawer by drawing the instrument admits the existence of the payee
and his then capacity to indorse; and engages that, on due presentment, the instrument will be accepted or
paid, or both, according to its tenor, and that if it be dishonored and the necessary proceedings on
dishonour be duly taken. He will pay the amount thereof to the holder or to any subsequent indorser who
may be compelled to pay it. But the drawer may insert in the instrument an express stipulation negativing
or limiting his own liability to the holder
Drawer secondarily liable. The drawer does not engage to pay the bill absolutely. He engages merely that the bill will
be accepted or paid or both, according to its tenor, and that he will pay only when: (1) it is dishonored; and (2) the
necessary proceedings of dishonour are duly taken.
To whom drawer secondary liable. The secondary liability of the drawer is in favor of: (1) the holder, or (2) if any of
the indorsers intervening between the holder and the drawer is compelled to pay by the holder, the drawer will be liable
to that indorser so compelled to pay
The law allows the drawer to negative or limit his liability by express stipulation.
Section 62. Liability of Acceptor. The acceptor, by accepting the instrument, engages that he will pay it
according to the tenor of his acceptance and admits: (a) The existence of the drawer, the genuineness of
his signature, and his capacity and authority to draw the instrument; and (b) The existence of the payee
and his then capacity to indorse
Where original tenor is altered before acceptance. Suppose the bill is originally for P1000. Before the drawee X
accepts it, it is altered by the payee to P4000. Then X accepts it. How much X is liable to a holder in due course?
View that altered tenor is tenor of acceptance. According to one view, X is laible for P4000. The reason is
that the of Xs acceptance is for p4000. Moreover, he would be a party who has himself assented to the
alteration.
View that original tenor is tenor of acceptance. Section 62 should be paraphrased to state that the
liability of the acceptor depends upon the terms of his acceptance, that is, whether it is a general or a qualified
acceptance or an acceptance for honor. An author suggests that all three of these acceptance contracts are
within the purview of Section 62 that the acceptor, by accepting the instrument, engages that he will pay it not
according to the tenor of the bill since this would deny him the right to qualify the acceptance or to accept for
honor but according to the tenor of his accecptance.
Effect of Section 124. It seems that this refer to the original tenor of the instrument taken from the
standpoint of the person principally liable.
Admission of drawers existence, etc. The acceptor, by his acceptance, admits: (1) the drawers existence, (2) the
genuineness of the drawers signature; and (3) the capacity and authority of the drawer to draw the instrument. But he
does not admit the genuine of the indorsers. He also admits the existence of the payee and his then capacity to
indorse.
Effect of acceptors admissions. (1) precluded from setting up the defense that the drawer is non-existent
or fictitious because of his admission of the drawers existence; (2) Neither can he claim that the drawers
signature is a forgery since he admits its genuineness; (3) Neither can the drawee escape liability by alleging
want of consideration between him and the drawer.
Section 63. When person deemed indorser. A person placing his signature upon an instrument otherwise
than as a maker, drawer, or acceptor, is deemed to be indorser unless he clearly indicates by appropriate
words his intention to be bound in some other capacity.
When person deemed indorser. In the absence of any indication in what capacity a person whose signature is
written on the instrument intends to be bound, he shall be deemed an indorser. But one making a note payable to his
own order does not, by indorsement thereof, assume liability as indorser
Indication to be bound otherwise. And one who signs otherwise than as maker, drawer, or acceptor, will not be
deemed an indorser if he indicates by appropriate words his intention to be bound in some other capacity.
Admissibility of parol evidence. Secition 63 is a statutory command that the legal effect of a blank indorsement
cannot be changed by parol proof or by evidence from other source. So that, under this section, one who indorses in
blank cannot show by parol that he signed merely as agent for a prior party and was not individually liable. He is an
indorser. Also the intent to be bound in some other capacity than as an indorser must be indicated in the indorsement
or on the face of the instrument and cannot be shown by parol.
Section 64. Liablitiy of irregular indorser. Where a person, not otherwise a party to an instrument, places
thereon his signature in blank before delivery, he is liable as indorser, in accordance with the following
rules: (a) If the instrument is payable to the order of a third person, he is liable to the payee and all
subsequent parties. (b) If the instrument is payable to the order of the maker or drawer, or is payable to
bearer, he is liable to all parties subsequent to the maker or drawer. (c) if he signs for the accommodation
of the payee, he is liable to all parties subsequent to the payee.
A person negotiating by mere delivery becomes liable to the holder only when the holder cannot obtain
payment from the person primarily liable by reason of the fact that any of the warranties of the person
negotiating by delivery is or becomes false.\
Warranty as to genuineness. The party negotiating by mere delivery is liable to the holder when the latter cannot
collect from the maker because the instrument is altered or the makers signature is forged.
Warranty as to good title. The party negotiating by delivery is also liable to the holder if his title is defective as he
acquired the instrument by means of fraud for which reason the holder cannot collect from the maker or acceptor.
Warranty as to capacity to contract. The party negotiating by delivery is also liable to the holder if the maker is a
minor or an incompent.
Warranty as to ignorance of certain facts. Suppose that the maker was insolvent at the time of the negotiation of
the instrument. The fact renders the instrument valueless, and for this reason, the holder cannot collect on the
instrument against the insolvent maker. (1) If the party negotiating by delivery knew that the maker was insolvent,,
and he concealed that fact, he would be liable because he warrants that he is ignorant of any fact that would render the
instrument valueless, and it turns out that he knew it. (2) the party negotiating by delivery would also be liable, if he
knew but concealed that the instrument is not valid for want of consideration.
To whom warranties extend. In favor of no holder other than the immediate transferee.
Warranties not exclusive. The four warranties expressed in this section are not exclusive but may be extended by
analogy to like situations
Liability of Qualified Indorser. The only difference is that while the person negotiating by mere delivery is liable only
to his immediate transferee, the person negotiating by qualified indorsement is liable to all parties who derive their title
through hi indorsement.
CHAPTER 7: Defenses
REAL DEFENSES VS. PERSONAL DEFENSES:
1.
2.
Real defenses: those wherein the facts disclose an absence of one or more of the essential
elements of a contract, or where the admitted contract is vitiated for all purposes for reasons of
public policy.
Personal defenses: those wherein the facts present a true contract but where, for various reasons,
such as fraud, duress, mistake, prior breach of contract by the holder, discharge before maturity,
and the like, the defendant is excused from his obligation to perform.
PERSONAL DEFENSES
Failure or Absence of
Consideration
Forgery
Illegal consideration
Non-delivery of complete
instrument
Non-delivery of complete
instrument
Material Alteration
Conditional delivery
complete instrument
Ultra
Vires
Corporation
act
of
of
Fraud in inducement
Duress or Intimidation
Want of authority
Prescription
Mistake
An ultra vires act is merely voidable which may be enforced by performance, ratification, or
estoppels
An illegal act is void and cannot be validated.
A negotiable instrument must be delivered. If the instrument has not been delivered, the contract
concerning the instrument is incomplete and revocable. Thus, there must be delivery whenever
the instrument is issued or negotiated.
Delivery must be either by or under the authority of the party making, drawing, accepting, or
indorsing the instrument.
If the instrument is no longer in the hands of the maker or the drawer, he is presumed to have
already delivered the instrument to another (payee) for the purpose of issuing the same
As between immediate parties and remote parties who are not holders in due course, the delivery
of a complete instrument may be established to be conditional or for a special purpose and not for
the purpose of transferring title.
As between immediate parties and remote parties who are not holders in due course, it may be
established that there was no delivery at all of the complete instrument.
As to holders in due course, it cannot be established that there was no delivery. Delivery is
conclusive as to the holder in due course if he is in possession of a complete instrument.
As to holders in due course, it cannot be established that the delivery was conditional or for a
special purpose. As to him, delivery is conclusively presumed to be unconditional and for the
purpose of transferring title without any reservation or condition.
Other Notes
1.
2.
3.
4.
5.
Delivery means transfer of possession of the negotiable instrument by one person to another with
the intention to transfer title to the instrument. This is involved in the issuance of the instrument,
negotiation of the instrument and in other forms of transfer.
A person in possession of an instrument that is wanting in a material particular has prima facie
authority to complete it by filling up the blanks therein strictly in accordance with the authority
given and within reasonable time.
If a person delivers a blank paper to another person containing his signature for the purpose of
converting it into a negotiable instrument, the person to whom the instrument is delivered has
prima facie authority to fill it up for any amount.
If the holder of the instrument, after it was filled up, is a holder in due course, the holder may
enforce the instrument as if it has been filled up strictly in accordance with the authority given and
within a reasonable time.
MATERIAL PARTICULAR
Example: an instrument that does not state the amount to be paid is not a complete instrument and a
material particular is missing.
Not limited to the matters mentioned as requisites under Sec. 1 of the NIL. It may include any detail that
affects the tenor of the instrument or the rights of the parties. It also includes matters mentioned in Sec.
125.
Sec. 125: any alteration which changes:
a. The date;
b. The sum payable, either for principal or interest;
c. The time or place of payment;
d. The number or the relations of the parties;
e. The medium or currency in which payment is to be made;
f. 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.
Prima Facie Authority
1.
Incomplete Instrument
The moment the instrument is completed, the presumption is that the instrument was
completed with prior authority from the maker or the drawer and that the person who
completed the instrument did not exceed in his authority.
Sec. 14 also presumes that the instrument was completed in accordance with the authority
that it was given.
2. Signed bank piece of paper
If a person delivers a blank piece of paper containing his signature to another person for the purpose of
converting it into a negotiable instrument the person
3.
to whom the instrument is delivered has prima facie authority to fill it up with any amount.
Requisites for presumption to operate:
i. There must be delivery of a paper to another person;
ii. The paper that was delivered was a blank paper containing the signature of the
person who will deliver;
iii. The delivery was for the purpose of converting the paper into a negotiable
instrument.
Holder in Due Course
If the holder is an HDC, then the last sentence of Sec. 14 still applies even if what was
delivered was a blank piece of paper signed by the person delivering the same but without
authority to convert it into a negotiable instrument.
Fraud
Fraud in Inducement vs. Fraud in execution
FRAUD IN
INDUCEMENT
The person who signs the
instrument intends to sign
the same as a negotiable
instrument
but
was
induced to do so only
through fraud
FRAUD IN EXECUTION
When a person is induced
to sign an instrument not
knowing its character as a
note or a bill.
is
vitiated
by
Notes
If fraud is committed in the performance of a collateral obligation, the nature of fraud is similar to fraud in
inducement and the defense is likewise a personal defense.
In the defense of fraud in factum, the person who signs the instrument lacks the knowledge of the
character or essential terms of the instrument. The defense is not available if the party involved had
reasonable opportunity to obtain such knowledge.
Factors to be considered in determining presence of reasonable opportunity:
1.
2.
3.
4.
5.
6.
MATERIAL ALTERATION
Alteration must be material before it can be considered a defense. Otherwise, it is not a defense at all.
However, a material alteration is only a partial real defense because the holder in due course can enforce
it according to its original tenor.
(See Secs. 124 and 125 for application of rules on application)
Sec. 124. Alteration of instrument; effect of. - Where a negotiable instrument is materially altered without
the assent of all parties liable thereon, it is avoided, except as against a party who has himself made,
authorized, or assented to the alteration and subsequent indorsers.
But when an instrument has been materially altered and is in the hands of a holder in due course not a
party to the alteration, he may enforce payment thereof according to its original tenor.
Concept of Alteration
PNB vs. CA (256 SCRA 491): An alteration is said to be material if it alters the effect of the instrument. It
means an unauthorized change in an instrument that purports to modify in any respect the obligation of
any party or an unauthorized addition of words or numbers or other change to an incomplete instrument
relating to the obligation of a party. In other words, a material alteration is one which changes the items
which are required to be stated in Sec. 1 of the Negotiable Instruments Law. (according to Justice Vitug,
an innocent alteration and spoliation will not avoid the instrument, but the holder may enforce it only
according to its original tenor. In addition, there is no alteration if only serial numbers were altered.
Other Notes:
An alteration that totally prevents recovery constitutes a material alteration it cannot be enforced by the
holder in due course according to its original tenor.
Alteration of the amount payable is material alteration.
If the negotiable instrument involved is a check, and the same was deposited by the holder in a collecting
bank, the collecting bank will suffer the loss in case of material alteration because the warranties of the
collecting bank are that of a general indorser.
Presence or absence of any third person who might read or explain the instrument to
1.
The payment of a check by the drawee includes its acceptance contemplated under Sec. 62. Actual
payment is greater than acceptance. Payee is thus protected in Sec. 62.
By paying the collecting bank, the drawee, recognized and complied with its obligation to pay in
accordance with the tenor of his acceptance. In other words, the drawee is liable on its payment of
the check according to the tenor of the check at the time of payment, which was raised the
amount.
The payee of the altered check may be a holder in due course. A payee who is a holder in due
course, who relied on the drawee banks clearance and payment of the draft and not being
negligent, the payee is amply protected by Sec. 62.
It further reasserts the usefulness, stability and currency of negotiable paper without seriously
endangering accepted banking practices.
The preferential treatment given to the paying bank by common law jurisdictions cannot be
applied in this jurisdiction, absent any similar provision in our law.
If the collecting bank cannot be considered to have acted as the representative of the drawee
bank when it debited respondents account, because the drawee bank had no right to recover what
it had paid.
The collecting bank cannot invoke the warranty of the payee/depositor who indorsed the
instrument for collection to shift the burden it brought upon itself. This is precisely because the
said indorsement is only for purposes of collection which, under Section 36, is a restrictive
indorsement.
2.
3.
4.
5.
6.
7.
Another view with respect to extent of recovery of holder in due course: It is worth noting that
there is a view to the effect that even if the payee in the said case is a holder in due course who is entitled
to protection, the protection should be in accordance with Sec. 124 of the Negotiable Instruments Law.
Opposite view regarding liability of payee and collecting bank: it also should be pointed out that
the obligation to return the amount of the altered check is an obligation that is fixed by jurisprudence and
statutory provisions. It is not a mere voluntary act but is one dictated by law and jurisprudence. Hence,
the view is that as between the drawee-bank and the collecting bank, it is the collecting bank that shall be
responsible for the loss in case of alteration.
There is also jurisprudence to the effect that the collecting banks right of recourse is against the
depositor-payee; that the payee will shoulder the loss because he has the same warranties of a general
indorser when he signs the check for deposit. (TimAq agrees with this view)
Ante-dating or Post-dating
Sec. 12. Ante-dated and post-dated. - The instrument is not invalid for the reason only that it is antedated or post-dated, provided this is not done for an illegal or fraudulent purpose. The person to whom an
instrument so dated is delivered acquires the title thereto as of the date of delivery.
In other words: If the post-dating or the ante-dating is for an illegal or fraudulent purpose, a personal
defense is available against the holder.
INSERTION OF A WRONG DATE
FEBTC vs. Gold Palace Jewellery Company, G.R. No. 168274, August 20, 2008.
a holder in due
ascertained and
is present if the
failed to comply
Parties who warrant or admit the genuineness of the signature in question; and
Those who by their acts, silence, or negligence are stopped from setting up the defense of forgery.
These include acts or omission that amount to ratification, express or implied.
Warranty
Indorsers, persons negotiating by delivery and acceptors are warrantors of the genuineness of certain
signatures on the instrument. They are precluded from setting up the defense of forgery in certain cases.
(ex. Sec. 62 NIL)
Negligence
A drawer who can otherwise recover from the drawee may be barred from doing so because of its
negligence or may have to suffer reduction of the amount. Included therein is ones failure to comply with
the rules or agreement or on the return of checks.
However, negligence cannot be imputed to the drawer by the mere fact that the person responsible for the
forgery is his employee or even an independent auditor.
Estoppel
Example: if
the drawer
opportunity
and Ratification
the drawer was already informed that a check bearing his forged signature is being encashed,
will be deemed to have ratified the forgery if he failed to act on such information despite
to do so.
Forgery in Notes
Makers Signature
Where the makers signature is forged, the maker is not liable to all subsequent parties whether the
instrument is an order instrument or a bearer instrument. (See Sec. 23)
However, indorsers after the forgery are still secondarily liable to the holder. These indorsers warrant that
the instrument is genuine and in all respect what it purports to be. Hence, they can no longer claim that
the instrument is not genuine.
Indorsers Signature
On Order Instruments: Where the indorsement of the payee is forged in a note payable to order, the
instrument cannot be enforced against the payee and the maker. The payees forged signature is wholly
inoperative and no right to enforce payment can be obtained against any party prior to the forgery. The
indorsers after the forgery are liable because they warrant that they have good title to the instrument.
On Bearer Instruments: In bearer instruments, the signature of the payee or holder is unnecessary to
pass title to the instrument. Hence, the maker may still be liable to a holder in due course even if an
indorsement was forged after the issuance of the note. The rule is consistent with Sec. 60 which provides
Drawers Signature
Where the drawers signature is forged, the drawer is not liable whether or not the instrument is payable
to bearer or payable order. There is no right to enforce payment against the drawer under the forged
signature. This is true even if the instrument is a bearer instrument because the drawer was never a party
to the instrument he did not promise to pay anybody. In addition, the drawers account cannot be
debited if his signature in a check was forged.
Drawee-Acceptors Warranties: drawee bank cannot recover the amount because by accepting the
instrument, he warrants all those mentioned in Sec. 63.
Negligence of Drawee: It can be further explained that the liability of the drawee in case the drawers
signature was forged can also be traced to the drawees negligence.
Indorsers Signature
On Order Instruments: Where the instrument of the payee in a bill of exchange was forged after
delivery of the instrument by the drawer to the said payee, the subsequent holder cannot enforce
payment thereof against the drawee, the drawer, or the payee. Parties prior to the forgery can raise the
defense of forgery. Parties after the forgery are cut-off from the parties prior to the forgery. Hence,
indorsers after the forgery may still be secondarily liable to the holder but indorsers prior to the said
forgery are not liable. If the instrument involved is a check, the drawee cannot charge the account of the
drawer if the payees or any indorsers signature is forged. The drawee, in turn has the right of recourse
against the collecting bank.
Other notes:
1.
2.
3.
4.
On Bearer Instruments: the same rule that is applicable to forged indorsement in a bearer promissory
note applies to forged indorsement in a bearer bill of exchange. The holder of a bearer instrument can still
recover from the drawer if a special indorsement was forged because the forged signature is unnecessary
for his title.
The liability of persons primarily liable automatically attaches the moment they make or accept the
instrument as the case may be.
effect: no further act is necessary in order that liability may accrue
Drawer
Indorsers
The liability of persons secondarily liable cannot be enforced immediately. There are necessary steps
to be taken. If the said steps are not complied with, they are discharged from the instrument or their
obligation is extinguished.
Presentment for payment must be made within the required period to the maker
Notice of dishonor should be given
Requisites:
Who: by the holder, or by some person authorized to receive payment on his behalf
When: at a reasonable hour on a business day
Where: at a proper place as herein defined
To Whom: to the person primarily liable on the instrument, of if he is absent or inaccessible, to any
person found at the place where the presentment is made
Effect if the 4 requisites are not complied with:
as if no presentment for payment was done
Holder
Some person authorized to receive payment on his behalf (examples: (1) collecting bank; (2)
agent; (3) heirs; (4) successors-in-interest)
Instrument NOT payable on demand on the day it falls due or on the maturity date fixed
Time of presentment
Instrument is payable at a fixed time payable at the time fixed therein without grace
Day of maturity of instrument falls on a Sunday or a holiday payable on Monday or
succeeding business day
Time
At the time
fixed
without
grace
If day of
maturity
falls on a
Promissory
note
Within a
reasonable
time after
its last
issue
Bill of
exchange
Within a
reasonable
time after
last
negotiation
Day of
maturity
falls on a
Saturday or
instrument
becomes
payable on
a Saturday
Saturday,
before
12nn or
Monday at
the option
of the
holder
Letters b-d are not applicable if place is specified. In such case, presentment must be made to any
person found in the specified place.
Although the indorser himself be the personal representative of the deceased person primarily liable,
presentment for payment is still necessary.
Exhibition of the instrument (Sec.74)
The instrument must be exhibited to the person from whom payment is demanded, and when it is
paid, must be delivered up to the party paying it.
Purpose:
a. To determine the genuineness of the instrument and the right of the holder to receive payment
b. To enable him to reclaim possession upon payment
When excused:
a. When the debtor does not demand to see the instrument but refuses payment on some other
grounds
b. When the instrument is lost or destroyed
When unnecessary:
a. Omission to contest it
b. Admission of the authenticity of the note implicit from the averment that substantial payments
were made thereon
c. Express waiver of demand, presentment, protest, and notice of protest and non-payment in
the note
Note: Demand by telephone is NOT sufficient because exhibition of the instrument is NOT possible.
When delay of presentment for payment is excused: (Art. 81)
When delay is caused by circumstances beyond the control of the holder and not imputable to his
default, misconduct or negligence.
Note: When the cause of delay ceases to operate, presentment must be made with reasonable
diligence.
Dishonor by non-payment of instrument:
-
1.
2.
Effect of dishonor by non-payment: An immediate right of recourse to all parties secondarily liable
thereon accrues to the holder (necessary condition: notice of dishonor was given to them)
b.
c.
d.
NOTICE OF DISHONOR
bringing either verbally or by writing to the knowledge of the drawer or indorser of an instrument, the
fact that a specified negotiable instrument upon proper proceedings taken, has not been accepted or has
not been paid, and that the party notified is expected to pay it.
purpose: to charge persons secondarily liable
burden of proof: holder must prove notice was given to drawer or indorser as the case may be
Form of Notice (Secs. 95&96)
may be verbal or in writing
contents:
a.
b.
c.
d.
Notes:
If the written notice lacks any of the aforementioned matters that should be stipulated in the contents,
the person given notice may orally state that there was dishonor to complete or validate the notice of
dishonor.
If there is misdescription, the notice is still valid and effective except if a party was in fact misled.
For purposes of BP 22, notice of dishonor must be in writing; verbal notice is not enough.
If notice of dishonor is in writing, it can be delivered personally to the person to whom notice should
be given or it may be sent to him by mail. (Sec.96)
Where parties
reside in different
places
If given at his
residence, it must
be given before the
usual hours of rest4
on the day
following.
If sent by mail, it
must be deposited
in the post office in
time to reach him in
usual course on the
day following
If sent by mail, it
must be deposited
in the post office in
time to go by mail
the day following
the day of dishonor
or if there be no
mail at a convenient
hour on last day, by
the next mail
thereafter
Where a party has added an address to his signature, notice of dishonor must be sent to that
address
If no address, either to the post office nearest to his place of residence or to the post-office where
he is accustomed to receive his letters
Usual hours of rest any of the hours when the member of the household are attending their ordinary affairs
4. To
a.
b.
c.
If he lives in one place and has his place of business in another, notice may be sent to either place
If he is sojourning in another place, notice may be sent to the place where he is so sojourning
Special circumstances:
a.
b.
- Person who should give notice knows that the person to receive notice is dead
- Person who is supposed to receive notice has a personal representative
- Personal representative could be found after the exercise of reasonable diligence
Notice to partners
Rule: Notice to one partner will bind the partnership
b.
c.
d.
e.
f.
When the drawee is a fictitious person or person not having capacity to contract and the indorser
was aware of that fact at the time he indorsed the instrument
Where the indorser is the person to whom the instrument is presented for payment
Where the bill is payable after sight or in any other case where presentment for acceptance is
necessary in order to fix maturity of the instrument
Where the bill expressly stipulates that it shall be presented for acceptance
Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee.
In the above 3 circumstances where presentment for acceptance is necessary, the following are the
requisites to charge persons secondarily liable:
1.
2.
Day of maturity is Saturday or payable at Saturday before 12nn provided it is not holiday
If bill is dishonored by non-acceptance, holder must give: (1) notice of dishonor by non-acceptance;
and (2) protest (in case of foreign bill). Otherwise, drawers and indorsers are discharged. (Sec.150)
If bill is dishonored by non-acceptance, no presentment for payment is necessary to hold drawers and
indorsers liable. (Sec. 151) But if after previous non-acceptance, bill is subsequently accepted,
presentment for payment is necessary.
If bill is accepted for honor, presentment for payment is necessary to charge acceptor for honor.
ACCEPTANCE
signification by the drawee of his assent to the order of the drawer (Sec.132)
Kinds of acceptance:
1. Actual acceptance
Requisites:
a.
b.
c.
In writing
Signed by the drawee
Must not express that drawee will perform his promise by any other means than the payment of
money
d. Must be communicated or delivered to holder
Notes:
The contemplated drawee shall describe the bill to be drawn and promise to accept it
Bill shall be drawn within a reasonable time after such promise is written
Holder shall take the bill upon the credit of the promise
The bill is at all times the property of the holder and he is entitled to have it when he wants it.
Mere failure to return the bill within 24 hours is an acceptance.
When acceptance may be made:
a. Before the bill has been signed by the drawer
b. Even when the bill is otherwise incomplete
c.
Even when the bill is overdue
d. Even after it has been dishonored by non-acceptance or non-payment
3. General acceptance
one that assents without qualification to the order of the drawer (Sec.139)
acceptance to pay at a particular place
4. Qualified acceptance (Sec.141)
a. Conditional; that is to say, which makes payment by the acceptor dependent on the fulfillment of a
condition stated therein
Example: Accepted, if Y marries Z. Sgd. X
b.
Partial; that is to say, an acceptance to pay part only of the amount for which the bill is drawn
Example: Bill is for P1000. Accepted for P500 only.
c.
d.
Qualified as to time
Example: Bill is payable 30 days after sight. Accepted, payable 60 days after sight.
e.
Notary public; or
Any respectable resident of the place where the bill is dishonored in the presence of two or more
credible witnesses
3. When protest is made
After acceptance
Before the date of maturity
When the acceptor has been adjudged bankrupt or insolvent or has made an assignment for the
benefit of creditors
purpose: to inform drawer and indorsers of the fact that acceptor is insolvent and may not pay the
bill, and to enable them to make necessary arrangements so that they will not be held liable thereon
and prevent loss of re-exchange.
2.
By payment in due course by the party accommodated where the instrument is made or accepted for
his accommodation
As between the accommodation party and the accommodated party, the latter is the one ultimately
liable, hence a principal debtor.
3.
5.
By any other act which will discharge a simple contract for the payment of money
Art. 1231: Extinguishment of obligations
a. Payment
b. Loss of the thing due
c. Condonation or remission of the debt
d. Confusion or merger of rights
e. Compensation
f. Novation
g. Annulment/rescission
h. Fulfillment of resolutory condition
i. Prescription
When the principal debtor becomes the holder of the instrument at or after maturity in his own right
requisites:
a. Reacquisition must be made by principal debtor
b. In his own right
c. At or after the date of maturity
in his own right not in a representative capacity (e.g. maker is agent or maker is holder as
executor or administrator)
Sec.88:
a.
b.
c.
d.
e.
f.
Notes:
Reason: the effect of such reservation is the implied reservation of their right of recourse against
person primarily liable
Note: The release must be a voluntary act of holder, not by operation of law and is for value.
1. it must be a binding contract, supported by valuable consideration and for a definite period
2. must be made with the principal debtor not with a third party
Effects of payment by indorser (Sec.121)
1. Instrument is NOT discharged but indorser who paid is discharged
2. Indorser is remitted to his former rights against parties prior to him
3. Indorser can strike out his indorement and all subsequent indorsements
rationale: indorsement of paying party subsequent indorsements are NOT necessary for his
title
4. indorser can renegotiate the instrument
exceptions:
a.
b.
where it is payable to the order of a 3rd person and has been paid by the drawer
when it is made or accepted for accommodation and has been paid by the party
accommodated
Renunciation by holder (Sec.122)
renunciation act of surrendering a right or claim without recompense but it can be applied with
equal propriety to the relinquishing of a demand upon an agreement supported by consideration.
Form:
1. Must be express
2. In writing
Time of making renunciation by holder:
1. Before maturity
2. At maturity
3. After maturity
When it discharges instrument:
1.
2.
CHAPTER 10 CHECKS
Check a bill of exchange payable on demand drawn on a bank (Sec.185)
essence: payable on demand (because the contract between the banker and the customer is that the
money is needed on demand)
KINDS OF CHECKS:
1. Cashiers check
one drawn by the cashier of a bank in the name of the bank against the bank itself payable to a
third person or order
Demand draft does not operate as an assignment of funds in the hands of the drawee who is not
liable on the instrument until he accepts it.
Cashiers check is a primary obligation of the bank which issues it and constitutes its written
promise to pay upon demand
a bill of exchange drawn by a bank on itself and accepted in advance by the act of its issuance
In order to discharge the instrument, the payment must be a payment in due course, and second, a payment
made by the principal debtor
If payment is made before the date of maturity, the instrument is not discharged as the payment is not in
due course
Where payment is made by a party who is not a primary obligor or an accommodation party, his
payment only conceals his own liability and those who are obligated after him. All prior parties primarily or
secondarily liable on the bill, are liable to such a payer, and the payer may cancel indorsements subsequent to his
own and reissue the paper, and it will be valid as against the prior parties
PAYMENT BY THIRD PERSONS
If payment is made by a third person, the instrument is not discharged because payment is not made by the
person principally liable
Not any one who desires may pay the instrument and then recover of the maker. He must be a person who has in
some way made himself liable for the payment of the instrument.
Exception: where an instrument has been protested and someone voluntarily makes payment supra
protest or for honor. And if the instrument was to give money in payment, the instrument is
discharged.
SUMMARY OF DISCHARGE BY PAYMENT
1. Payment by a person ultimately liable, whatever his position in the paper, is a discharge of the instrument
2. Payment by an accommodation party isnt a discharge of the instrument, whatever his position
thereon and whether the indorsement be regular or anomalous
3. Payment by the drawer or indorser is not a discharge of the instrument
**PRINCIPAL DEBTOR
A creditor isnt bound to accept a check in satisfaction of his demand because a check, even if good when
offered, doesnt meet the requirements of legal tender
WAIVER OF OBJECTION TO TENDER OF PAYMENT BY CHECK
It is the general rule that an object to a tender must, to be available to the creditor, be made in good time and
that the grounds for objection must be specified; and that an objection to tender on one ground is a waiver of all other
objections which could have been made at that time
It is ordinarily required of one to whom payment is offered in the form of a check, that he makes his objection at
the time of the offer of by check instead of an offer of payment in money
Payment by check has become so generally recognized as acceptable in business transactions that it has been held
that omission to make objection to a check as tender payment is regarded as a waiver of the right to demand payment
Reason for the ruleto afford the debtor the opportunity to secure the specific money which the law prescribes
shall be accepted in payment of debts
PAYMENT BY ACCOMMODATED PARTY
Hence, his payment in due course discharges the instrument as if payment was made by the principal
debtor under paragraph (a).
INTENTIONAL CANCELLATION
There must be an intention to cancel a negotiable instrument by the holder thereof as such intention is
an essential element of discharge on a negotiable instrument and a negotiable note in a torn condition is presumed
cancelled by the holder thereof
WILL AN EXTENSION OF TIME GRANTED BY THE HOLDER TO THE DEBTOR DISCHARGE THE INSTRUMENT?
Shows the legislative intent to that an extension of time by the holder will not discharge the instrument
PRINCIPAL DEBTOR ACQUIRES INSTRUMENT
Reacquisition must be by the principal debtor and in his own right at or after the date of maturity
A reacquisition by the principal debtor in his own right but before maturity will not discharge the
instrument
If a judgment is obtained on a bill or note, the bill or note is thereby extinguished and merged in the judgment.
But the judgment alone, without actual satisfaction, is not extinguishment as between plaintiff and other parties
not jointly liable with the original defendant, whether those parties be prior or subsequent to the defendant
A discharge in bankruptcy, unless otherwise provided by statute, releases a bankrupt from all his provable debts,
and therefore will discharge the bankrupt on all bills accepted, or notes made by him but will not discharge the other
parties
Sec. 120. When persons secondarily liable on the instrument are discharged. - A person secondarily liable on
the instrument is discharged:
(a) By any act which discharges the instrument;
(b) By the intentional cancellation of his signature by the holder;
(c) By the discharge of a prior party;
(d) By a valid tender or payment made by a prior party;
(e) By a release of the principal debtor unless the holder's right of recourse against the party secondarily liable is
expressly reserved;
(f) By any agreement binding upon the holder to extend the time of payment or to postpone the holder's right to
enforce the instrument unless made with the assent of the party secondarily liable or unless the right of recourse
against such party is expressly reserved.
EFFECT OF SECTION 120 IS A SURETYSHIP
Generally the courts regard this provision as exclusive, as a complete codification of the law of discharge of
secondary parties by the six methods therein set forth
ACTS THAT DISCHARGE INSTRUMENT
Any of the acts that will discharge an instrument under Section 119 will discharge a party secondarily
liable thereon, such as payment in due course by the maker. This will discharge the indorsers in the note.
DISCHARGE BY OPERATION OF LAW IS NOT INCLUDED
Tender of payment: act by which one produces and offers to a person holding a claim or demand
against him the amount of money which he considers and admits to be due, in satisfaction of such claim or demand
without any stipulation or condition
**RELEASE MUST BE ACT OF HOLDER
**RELEASE MUST BE FOR VALUE
EFFECT OF RELEASE ON ACCOMMODATION MAKER OR ACCEPTOR
General rule is that he is not discharged by the holders release of the principal debtor even if the release be
made with knowledge of the true relation of the parties and, conversely, the release of the
accommodation maker or acceptor does not discharge the principal debtor through the latter occupies the position
of a party secondarily liable on the instrument
EXTENSION OF TIME
If the holder agrees to extend the time of payment, the indorsers are discharged
Exceptions- (1) where the extension of time is consented to by the party secondarily liable, he is not
discharged;
(2) where the holder expressly reserves his right of recourse against the party secondarily liable, the latter is not
discharged.
REQUISITES OF AGREEMENT FOR EXTENSION OF TIME
1. It must be a binding contract, supported by valuable consideration and for a definite period
2. It must be made with the principal debtor and not with a third par
Sec. 121. Right of party who discharges instrument. - Where the instrument is paid by a party secondarily liable
thereon, it is not discharged; but the party so paying it is remitted to his former rights as regard all prior parties, and
he may strike out his own and all subsequent indorsements and against negotiate the instrument, except:
(a) Where it is payable to the order of a third person and has been paid by the drawer; and
(b) Where it was made or accepted for accommodation and has been paid by the party accommodated.
Where a drawer of a certified check was required to take up the check because of the failure of the drawee bank,
the instrument is not discharged and he is subrogated to the rights of the payee.
Sec. 122. Renunciation by holder. - The holder may expressly renounce his rights against any party to the
instrument before, at, or after its maturity. An absolute and unconditional renunciation of his rights against the
principal debtor made at or after the maturity of the instrument discharges the instrument. But a renunciation
does not affect the rights of a holder in due course without notice. A renunciation must be in writing unless the
instrument is delivered up to the person primarily liable thereon.
APPLICATION OF SECTION 122
1. Applies only to renunciation by the unilateral act of the holder without consideration and in cases where the
instrument is not delivered up to the person intended to be released
2. Renunciationact of surrendering a right or claim without recompense but it can be applied with equal
propriety to the relinquishing of a demand upon an agreement supported by a consideration
FORM OF RENUNCIATION
It must be in writing and must be express
However, if the instrument is delivered to the person primarily liable, the renunciation may be ORAL.
Sec. 123. Cancellation; unintentional; burden of proof. - A cancellation made unintentionally or under a
mistake or without the authority of the holder, is inoperative but where an instrument or any signature thereon
appears to have been cancelled, the burden of proof lies on the party who alleges that the cancellation was
made unintentionally or under a mistake or without authority.
MEANING OF CANCELLATION
Signifies not only the drawing of criss-cross lines but also tearing, obliterations, erasures or burning
It may be made by any other means by which the intention to cancel the instrument may be evident
Sec. 124. Alteration of instrument; effect of. - Where a negotiable instrument is materially altered without the
assent of all parties liable thereon, it is avoided, except as against a party who has himself made, authorized, or
assented to the alteration and subsequent indorsers.
But when an instrument has been materially altered and is in the hands of a holder in due course not a party to the
alteration, he may enforce payment thereof according to its original tenor.
Where an instrument has been materially altered, it is avoided in the hands of one who is not a holder in due
course as against a prior party who has not assented to the alteration
WHERE INSTRUMENT NOT AVOIDED AS TO HOLDER NOT IN DUE COURSE
1. A party who has made the material alteration
2. A party who has authorized the material alteration
3. A party who has assented to the material alteration
4. Any subsequent indorsers
RIGHTS OF HOLDER IN DUE COURSE NOT A PARTY TO THE ALTERATION
He could recover the altered tenor to any party who has made, authorized or assented the alteration,
or any subsequent indorser of the instrument
**NO DISTINCTION BETWEEN FRAUDULENT AND INNOCENT ALTERATION
RIGHT TO COLLECT ORIGINAL CONSIDERATION
When the alteration wasn't fraudulently done, the holder may recover the original consideration
**WHERE DRAWEE BANK PAYS ALTERED AMOUNT, DRAWER HAS THE RIGHT TO HAVE HIS ACCOUNT DEBITED WITH
CORRECT AMOUNT ONLY
As between the bank and its depositors, the payment of forged or altered checks by it is made at its peril and
cannot be charged against the depositors account UNLESS some negligent act or misconduct of his has contributed to
induce such payment, the bank itself being free from negligence.
Sec. 125. What constitutes a material alteration. - Any alteration which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment:
(d) The number or the relations of the parties;
(e) The medium or currency in which payment is to be made;
(f) 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.
Examples of MATERIAL ALTERATION: (1) substituting the words or bearer for order; (2) writing protest
waived above blank indorsements; (3) a change in the date from which interest is to run; (4) adding the words with
interest with or without a fixed rate; (5)an alteration in the maturity of a note, whether the time for payment is
thereby curtailed or extended; (6) An instrument is payable to PNB, the plaintiff added the word Marion; (7) striking
out the name of the payee and substituting that of the person who actually discounted the note
Examples of IMMATERIAL ALTERATION: (1 )changing I promise to pay to we promise to pay where there are
two makers; (2) adding the word annual after the interest clause; (3) adding the date of maturity as a marginal
notation; (4)filling in the date of actual delivery where the makers of a note gave it with the date in blank, july.; (5)
where there is a blank for the place of payment, filling in the blank with the place desired
When the minor continues the business of his parents or predecessors through a guardian
Investment in stocks of a corporation
A minor at least 7 years old may open a bank savings account or time deposit and
withdraw the same without assistance of his parent or guardian (PD 734)
Persons disqualified in engaging in commercial transactions
A. Absolutely Disqualified
1. Persons suffering the penalty of civil interdiction
2. Persons declared as bankrupt
3. Persons disqualified by special laws or provisions
B. Relatively Disqualified
1. Justices of the SC, judges, and officials of the department of public prosecutors in
actual service
2. Administrative, economic or military heads of districts, provinces or posts
Employees engaged in the collection and administration of public funds of the State,
appointed by the government
Stock or brokers of any class
Those who by virtue of laws or special provisions, may engage in commerce in a
determinate territory
Members of Congress
President, Vice-President, members of Cabinet and their deputies or assistants
Members of Constitutional Commission
President, Vice-President, members of the Cabinet, Congress, Supreme Court and the
Constitutional Commission, Ombudsman with respect to any loan, guaranty or other
form of financial accommodation for any business purpose by any government-owned
or controlled bank to them
Commercial contract an agreement between two or more merchants or nonmerchants binding themselves to give or to do something in commercial transactions
Macariola v. Asuncion: Art. 14 of the Code of Commerce (a Spanish law) providing for
the relative disqualification of judges is political in nature as it regulates the relationship
between the government and certain public officers and employees like justices and
judges. Upon the transfer of sovereignty from Spain to US and later on US to Philippines,
said provision must be deemed abrogated because where there is change of sovereignty,
political laws of the former sovereign, whether compatible or not with those of the new
sovereign are automatically abrogated. There being no explicit re-enactment by the new
sovereign, disqualification should be considered to have since lost its legal and binding
force on judges. Hence, the Court ruled in the said case that there was no violation of the
said rule when Asuncion associated himself with a company as a stockholder while being
concurrently a CFI judge.
Jose Berin v. Judge Felixberto Barte:
The Court ruled that Barte committed an impropriety in acting as a broker in the sale of a
real estate. This is so since while Sec. 14 of the Code of Commerce had already been
abrogated as ruled in Macariola v. Asuncion, the Code of Judicial Conduct which took effect
on October 20, 1989, refrained judges from entering into financial and business dealings
that tend to reflect adversity o the courts impartiality.
Letter of Credit
-
an engagement by a bank or other person made at the request of a customer that the
issuer will honor drafts or other demands for payment upon compliance with th
conditions specified in the credit (Prudential Bank v. IAC; Bank of Commerce v.
Serrano)
one wherein the bank merely substitutes its own promise to pay for the promise to
pay of one of its customers who in return promises to pay the bank the amount of
funds mentioned in the letter of credit plus credit or commitment fees mutually agreed
upon
one issued by a bank in order to aid a person who may not have a capital for the
importation of goods and merchandise7
a request by one bank (addressed usually to another bank) to advance money or
credit to a third person, upon fulfillment of certain conditions, usually by the latter on
the promise of the issuer bank to repay the same; issuer in turn look for the person
applying for the same for satisfaction
When does the letter of credit become void (Art. 572, Code of Commerce)
if the bearer of a letter of credit does not make use of it within the period agreed upon
with the drawer
Buyer procures the letter of credit and obliges himself to reimburse the issuing bank
upon receipt of the documents of title
2. Bank (issuing/opening) undertakes to pay the seller upon receipt of the draft and proper
documents of title and to surrender the documents to buyer upon reimbursement
3. Seller (payee/beneficiary) who in compliance with the contract of sale ships the goods to
the buyer and delivers the documents of title and draft to the issuing bank to recover
payment
Other parties:
7
8
Definition of Dean
Relationship between notifiying bank and issuing bank: agency
6.
Confirmed letter of credit whenever beneficiary stipulates that the obligation of the
opening bank shall also be made the obligation of a bank to himself
2. Unconfirmed letter of credit obligation only of the issuing bank
3. Irrevocable letter of credit obligates the issuing bank to honor drafts drawn in
compliance with the credit and can neither be cancelled nor modified without the
consent of all parties including in particular the beneficiary/exporter
4. Revocable letter of credit can be cancelled at anytime before payment; intended to
serve as a means of arranging payment but not as a guarantee of payment
5. Revolving letter of credit valid for several transactions over a given period of time
such as a week or month
Non-revolving letter of credit one that is valid for one transaction only
Bank becomes entruster of the goods while the buyer-importer is the entrustee. The
goods will in effect be released by the bank to the buyer by the delivery of the
documents of title or bill of lading covering the goods. Buyer as entruster is obligated
to sell the goods and to apply the proceeds thereof to the payment of the loan
extended by the entruster-bank, buyer will only get the balance of the proceeds of the
sale after making such application.
Purposes: (Section 2)
1.
2.
3.
To encourage and promote the use of trust receipts as an additional and convenient
aid to commerce and trade
To regulate trust receipt transactions in order to assure the protection of rights and the
enforcement of the obligations of the parties involved therein
To declare the misuse and/or misappropriation of goods or the proceeds realized from
the sale of goods, documents or instruments released under trust receipts as a
criminal offense punishable under Art.315 of the RPC
To receive the proceeds of the sale of the goods, documents or instruments released under
a trust receipt to the entrustee to the extent of the amount owing to the entruster
To the return of the said goods, documents or instruments in case they could not be sold
To cancel the trust in case the entrustee defaults, take possession of the goods,
documents or instruments and sell the same at public or private sale
To hold the goods, documents or instruments in trust for the entruster and to dispose
of them strictly in accordance with the terms of the trust receipt
To receive the proceeds of the sale of the goods, documents or instruments in trust
for the entruster and to turn over the same to the entruster to the extent of the
amount owing to the entruster
To insure the goods for their total value against loss from fire, theft, pilferage or other
casualties
To keep the goods, documents or instruments or the proceeds thereof whether in
money or whatever form, separate and capable of identification as property of the
entruster
To return the goods, documents, or instruments to the entruster in case they could
not be sold or upon demand of the entruster
To observe all other terms and conditions of the trust receipt