Negotiable Instrument Law Module

1st Semester, AY 2020-2021

Atty. Christian Wilfred D. Morales, CPA

Module 3

Defective Instruments due to Want of Completion or Delivery

Completion entails filling up strictly in accordance with the authority of given and within the reasonable
time. Delivery refers to the transfer of possession, actual or constructive, from one person to another. As
discuss earlier, issuance is the first delivery. Without initial delivery, there can be no liability on the
instrument.

1. Incomplete but delivered instrument – under this scenario, the maker or drawer delivers a pre-
signed blank paper to another person for the purpose of converting it into a negotiable
instrument. The person to whom the instrument is presumed to have an authority to fill-up
and complete the instrument according to the authority given and within reasonable time.
This is only a personal defense which cannot be invoked against a holder in due course.

2. Incomplete and undelivered instrument – under this scenario, even if the instrument is
completed and delivered, the instrument cannot be enforced against any holder as against any
person whose signature was placed thereon before delivery. This is a real defense which can
be invoked against any holder, even to a holder in due course.

3. Complete but undelivered instrument – under this scenario, the maker or drawer completes
the instrument but no delivery was made. An incomplete but undelivered instrument creates
liability on the part of the drawer. This is only a personal defense which cannot be invoked
against a holder in due course.

Rules of Construction in Case of Ambiguity

1. Where the sum payable is expressed in words and also in figures, the sum denoted by the
words is the sum payable. If the words are ambiguous, reference may be made to figures to
fix the amount.

2. Where the instrument provides for the payment of interest without specifying the date from
which the interest is to run, the interest runs from the date of the instrument, and if the
instrument is undated, from the date of issue.

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

4. In case of conflict between the written and printed version, the written provision prevails.

5. Where the instrument is so ambiguous that there is doubt whether the instrument is a bill or a
note, the holder may treat the same as either at the holder’s election.

6. Where a signature is placed upon the instrument and it is not clear on what capacity the
person making the same intended to sign, he is deemed to be an indorser

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 7. Where the instrument containing the word “I promised to pay” is signed by two or more
persons, they are deemed to be jointly and severally liable.

Signatures

A person whose signature appears in the instrument is liable to the instrument. However, under the
following circumstances, a person is liable to the instrument even if such person’s signature does not
appear in the instrument itself.

1. If a person uses assumed name or trade name.

2. When the authorized agent signs for and in behalf of a principal, then the principal is liable. If
the agent merely signs as agent without disclosing his principal, the agent is liable.

3. A signature by “procuration” operates as notice that the agent but has a limited authority and
to sign and the principal is bound only in case the agent acted within the actual limits of his
authority. A signature by procuration is signifying by “per procuration”, “per proc.”, “P.P.” or
“pp”. In signature by procuration, it is incumbent upon the person dealing with the agent to
verify the actual parameters of authority the agent has.

4. The forger is liable even if his signature does not appear in the instrument.

5. When the person making the signature signs on a paper separate from the instrument, such as
allonge.

Indorsement by Incapacitated Persons

Incapacitated persons, such as minors and corporations acting beyond its authority (ultra vires), the
indorsee acquire title to it and can enforce the instrument against the maker or acceptor or other parties
prior to the minor. The defense of minority can only be invoked by the minor to recuse him from liability.
This is a real defense by the minor which can be invoked against a holder in due course. As regards to all
other parties, minority is

Forgery

Forgery is the counterfeiting of any writing, consisting in the signing of another’s name with intent to
defraud. The effects of forgery are as follows;

1. It is wholly inoperative.
2. No right to retain the instrument.
3. No right to give a discharge therefor.
4. No right to enforce payment thereof against any party thereto.

The effect of forgery is not iron-clad rule. There is an exception – in case of negligence on the part of the
party invoking forgery to excuse him from liability. Exception aside, a person whose signature on a
negotiable instrument is forged is deemed to have never become a party to the instrument and has never
consented to the contract that allegedly gave rise to it. He cannot be held liable thereon, by any one.

Please bear in mind that forgery under this rule covers also forged indorsement. Since one of the effects
of forge signature is the inoperativeness, no one can gain title to the instrument. Such indorsement

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prevents any party from acquiring from acquiring any right as against any party whose name appears prior
to the forgery.

To provide clarity for the different rules, the following are the effects of forgery.

A. Promissory Note

a. Payable to Bearer – please be reminded that a bearer instrument is negotiated generally

by delivery.

Maker Maker Indorser Subsequent

whose whose Indorsers
Signature Signature
was Forged was Forged
Maker’s Not Liable to n/a n/a Liable to a
Signature Anyone Holder in Due
forged Course
Indorsement n/a Liable to a Not Liable to Liable to a
forged Holder in Anyone Holder in Due
Due Course Course

b. Payable to Order – please be reminded that an order instrument is negotiated generally by

endorsement and delivery.

Maker Maker Indorser Subsequent

whose whose Indorsers
Signature Signature
was Forged was Forged
Maker’s Not Liable to n/a n/a Liable to a
Signature Anyone Holder in Due
forged Course
Indorsement n/a NOT Liable Not Liable to Liable to a
forged to a Holder Anyone Holder in Due
in Due Course
Course

The above table will show that the maker and indorser whose signatures were forged are not
liable because as to them, the instrument is wholly inoperative. Subsequent indorsers are liable to
a holder in due course because they have warranties that the instrument is genuine in all respect
and what it purports to be.

When an indorsement is forged on an instrument payable to bearer, the maker is liable to a holder
in due course. However, if the instrument is payable to order, the maker is not liable to a holder in
due course because an order instrument requires negotiation and delivery to effect a valid
indorsement. A bearer instrument requires only delivery to effect a valid indorsement. As such,
any indorsement made on a bearer instrument would have no effect on the liability of the maker.

B. Bill of Exchange

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 a. Payable to Bearer – please be reminded that a bearer instrument is negotiated generally
by delivery.

Drawer Drawer Indorser Subsequent

whose whose Indorsers
Signature Signature
was Forged was Forged
Maker’s Not Liable to n/a n/a Liable to a
Signature Anyone Holder in Due
forged Course
If Drawee Not Liable to n/a n/a n/a
accepts/pays Anyone;
acceptor
shoulders the
loss
Indorsement n/a Liable to a Not Liable to Liable to a
forged Holder in Anyone Holder in Due
Due Course Course

b. Payable to Order – please be reminded that an order instrument is negotiated generally by

endorsement and delivery.

Drawer Drawer Indorser Subsequent

whose whose Indorsers
Signature Signature
was Forged was Forged
Maker’s Not Liable to n/a n/a Liable to a
Signature Anyone Holder in Due
forged Course
If Drawee Not Liable to n/a n/a n/a
accepts/pays Anyone;
acceptor
shoulders the
loss
Indorsement n/a Liable to a Not Liable to Liable to a
forged Holder in Anyone Holder in Due
Due Course Course

The rules on a bill of exchange are the same as that of a promissory note except that there is a
drawee/acceptor in a bill of exchange. The acceptor cannot raise the defense of forgery because
the acceptor admits the genuineness of the signature of the drawer.

Material Alteration

An alteration is considered material when it changes the date, the sum payable, either the principal or the
interest, the time or place of payment, the number of the relations of the parties, the medium or currency
in which payment is to be made, adds a place of payment where no place of payment is specified and
when it alters the effect of the instrument in any respect.

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Material alteration means unauthorized change in the instrument that modify the obligation of a 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, material alterations are alteration which changes the elements of
negotiability.
When the instrument is materially altered without the express consent of all the parties liable thereon, it is
avoided except as against party who has himself made, authorized, or assented to the alteration, and
subsequent indorsers. But when the instrument is in the hands of a holder in due course, he may enforce
payment according to its original tenor.

An innocent alteration (changes which does not affect the elements of negotiability) and spoliation
(alteration done by a stranger) will not avoid the instrument but the holder may enforce it only according
to its original tenor.

Philippine Clearing House Corporation issued CHOM No. 15-460 which took effect on January 4, 2016,
the no erasure rule. Under the said rule, checks that have the following alterations shall no longer be
accepted for clearing, to wit: date, name of payee, amount in figures, amount in words, signature of the
drawer, account name, account number, check number or MICR. The rule also cover those which does
not indicate date, payee, amount payable in figures, amount payable in words except those checks issued
by the banks using a check writer and signature of the drawer.

Consideration

It is presumed that a negotiable instrument has been issued for a valuable consideration and every person
whose signature appears thereon has become a party thereon for value. This is the underlying reason why
there is no more need to indicate “for value received” in the face of instrument.

If value has been given for the instrument, the holder is deemed a holder for value in respect to all parties
who became such prior to that time. Absence of a consideration is a personal defense which can be
invoked only by to a holder not a holder in due course.

Accommodation Party

An accommodation party is one who has signed the instrument as maker, drawer, acceptor or indorser
without receiving value for the purpose of lending his name to some other person. Such person is liable
on the instrument notwithstanding that the transaction is an accommodation.

The accommodation party is in effect lending his name to enable the accommodated party to obtain credit
or money. He received no part of the consideration for the instrument but assumes liability to the other
parties because he wants to accommodate another.

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Reference:
Tambasacan, Rocille S. Negotiable Intruments in a Nutshell. Central Bookstore.
De Leon, Hector. The Law on Negotiable Instruments (with Documents of Title). Rex Bookstore Inc. 2000.
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